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An Introduction to Business Valuation

January 07, 2021

The value of a business is an important consideration for succession, estate and gift tax planning. What is business valuation? We dive in here.

When you assess your total net worth, there is at least one asset that may be difficult to put a price on: your closely held business. The value of a closely held business is an important consideration for succession, estate and gift tax planning. In addition, a valuation is an important tool to be used for benchmarking to determine how an owner can improve the operating value of what may be their most prized asset.

What is business valuation?

A business valuation is the process of determining the economic value of a whole business or company unit. Business valuation is a form of art rather than science. No two experts will assess the value of a business the same. While variables could be assessed differently, the process conducted by an appraiser should be similar.

The following key terms are important to consider when obtaining a business valuation.

  • Valuation Purpose
  • Valuation Date
  • Ownership Interest
  • Premise of Value
  • Standard of Value
  • Report/Analysis Needed for Client
  • Experience and Qualifications of Appraiser

In addition, as part of any valuation process, a business valuation analyst should consider the following while performing a valuation engagement:

  • Reliable financial information
  • Management Interview and/or (Virtual) Site Visit
  • Benchmark Industry Resources
  • Economic/Industry Impact and Outlook
  • Normalization Adjustments
  • Valuation Approaches and Selection

Engagement types

It is important to consider the types of reports and engagements available. The three most common engagements are:

  • Conclusion of Value Engagement- A conclusion of value is the most complete analysis an expert can provide. In addition to full consideration of assessing all the factors and terms above, the analyst follows professional standards to prepare a full-length report to support their opinion. This engagement is best for estate/gift tax planning, highly contested business separations and/or if the highest level of assurance of an expert’s opinion is necessary.
  • Calculation of Value Engagement- A calculation of value analysis will involve the majority of technical procedures completed during a conclusion of value engagement; however, the reporting standards are less in scope than the conclusion of value. If there is a desire to obtain a faster appraisal in an amicable negotiation, this engagement is best and the most cost effective.
  • Financial Consulting and/or Oral Report Engagement- A financial consult or oral report engagement is an analysis in which the expert, at a minimum completes a review of financial information and prepares financial models. This engagement could result in the expert communicating the cash flow available to the owner, performing benchmarking analysis to industry ratios and multiples for comparison purposes or executing limited valuation procedures to communicate a range of values for an owner. A financial consult and/or oral report engagement is the most modestly priced valuation service and is useful for a fundamental understanding and overview of the business used as a resource to improve operations.

What is the benefit of a business valuation?

Business valuation is a financial term that may sound overwhelmingly complex but is more straightforward and insightful than expected. If you’re looking for a comprehensive quantitative and qualitative assessment of your business, a business valuation can not only help an owner understand the worth of their business but can also be utilized to identify strengths and weaknesses in operations.

There isn’t a better time to value your closely held business. We can help you navigate the process and complete the analysis you need. Please reach out to a member of our Business Valuation Services group if would like to learn more about business valuation and how it can be the best tool for you to identify and improve your business’ value.

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