Whether you’ve been told that you need a business valuation, or you’ve simply decided it’s time to know what your business is worth, it can be difficult to know where to start. Chances are you’ve never had your business valued before, nor do you know of anyone who has. It’s equally doubtful that you have the name of even one business valuation specialist in your contact list.
If you’re starting from ground zero, here are five questions that will get your business valuation started on the right foot.
1. What is your reason for having the business valued?
The purpose for having your business valued needs to be crystal clear, as it will drive all other aspects of the process. Every business valuation starts with nailing down these two things: Who wants to know the value, and why?
It’s not enough to say that you’re an owner who wants a business valuation for the purpose of transferring ownership. That could mean a number of different things, including:
- You own 100% of your business and want to get an idea of what it would be worth to an outside buyer.
- You own a noncontrolling interest and want a valuation for a partnership dispute over a buyout offer.
- You are one of two partners wanting a valuation for your startup so you can sell equity and raise capital from a new investor.
- You and your spouse want to gift shares of stock in your business to your children.
All four of the above are examples of ownership transfers, but none of them will be valued in the same way. Furthermore, the four reports listed above may come with four different price tags, and at least two of them need to be certified.
Without getting too far into the weeds, which happens fast with this topic, just know that you’ll want to be very specific about who needs the business valuation report and what it will be used for.
TIP: Be specific about who wants to know the value of the business and why. This will set you up to find the right valuation expert, and get the most useful and accurate report.
2. Does your business valuation need to be certified?
There’s some debate around when a valuation needs to be certified, but these three circumstances in particular require a certified report:
- Regulatory — For example, company stock in an ESOP must be valued annually, and falls under the purview of ERISA and the DOL.
- Tax — IRS Revenue Ruling 59-60 gives clear guidance on how to value a privately-held business for tax reporting purposes, including gift and estate planning, and many other tax circumstances.
- Litigation — Pretty much any report that’s going to end up in court needs to be certified. Examples would include divorce, shareholder disputes and bankruptcy, among others.
When it comes to transactions, it’s typically not necessary to have the business valuation certified. Transactions could include valuations for exit planning, buy/sell agreements, or a potential sale of the business. In general, if you want a valuation to guide your own internal decision-making process, the report probably doesn’t need to be certified.
TIP: If an attorney, CPA or banker tells you to get a business valuation, ask if it needs to be certified. If the valuation is for your own internal purposes, an uncertified report is probably fine.
3. How much does a business valuation cost?
Not surprisingly, certified valuations are more expensive than uncertified. Expect the price of a certified valuation report to start in the $5K-$10K range and go up to $20K-$25K. If the valuation is especially complex, the price could go even higher.
There are many professionals with deep expertise in certain areas, like mergers and acquisitions, who produce excellent valuation reports that are not certified. The cost of an uncertified report is typically around $5,000 or less.
TIP: Beware of the free or cheap business valuation! You get what you pay for. You may also pay a hefty price for relying on an inaccurate or misleading value for your business.
4. Who should you hire to value your business?
If your business valuation report needs to be certified, you’ll clearly need to hire a professional with the right credentials. These are the four main valuation credentials you’ll find:
- CVA — Certified Valuation Analyst, issued by NACVA
- ABV — Accredited in Business Valuation, issued by the AICPA
- CBA — Certified Business Appraiser, issued by the IBA
- ASA – Accredited Senior Appraiser, issued by the ASA
If you don’t need a certified business valuation, look for a professional who has many years of experience doing the type of valuation you need. By way of example, Allan Taylor & Co. does business valuations for exiting owners who are considering selling to an outside buyer. We have over a decade of experience as business brokers and M&A advisors, so we are well-versed in how buyers value an acquisition target.
Many business owners assume that their current CPA does business valuations, only to find that they don’t. If that’s the case, your CPA should be able to refer you to a good valuation specialist that they know, have heard of, or have worked with in the past. (Even if your current CPA does do valuation work, there is some debate about whether your accountant should do your business valuation.)
TIP: Whether you need a certified business valuation or not, make sure you hire someone with many years of experience doing the type of valuation you need. If you’re unsure about the caliber of their work, ask for references from CPA’s, attorneys and past clients.
5. How long does it take to get a business valuation?
In general, expect the valuation process to take about three to six weeks. If someone tells you they can get a business valuation turned around in two weeks or less, I’d wonder about the quality of the report you’re getting. Regardless of the size of the business or industry, there’s quite a bit of work that goes into any valuation.
If you’re in a hurry, some valuation specialists will speed up their usual process for an additional rush charge.
TIP: You want someone to do a thorough job of valuing your business, so expect it to take three to six weeks. We’re talking about real life valuation here, not Shark Tank.
A valuation is oftentimes part of a larger event, like selling your business. It pays to take your time on the front end and make sure you’re hiring the right professional for the job. The last thing you want is to end up with a valuation report that doesn’t suit your purposes, or your pocketbook. Answering these five questions will get you started down the right path.
Contact us if you’d like to discuss getting a valuation for your business.