If you’re thinking of selling your company, at some point you will need a valuation of your business. A third-party valuation allows you to objectively determine the value of your business to outside investors and potential buyers.
Too often, there is a valuation gap when owners prepare to sell. They think that their company is worth more than it usually is. The reason for this is because they did not start with a realistic understanding of the fair market value of their company. Not knowing their business worth can slow down mergers and acquisitions (M&A) — if not tank them altogether.
It’s important for owners to consistently be aware of their company’s value. So, just how much does a business valuation cost? This article covers the answer to that question and more.
You’ll learn what a business valuation typically includes and how much it costs. You’ll also learn why they are important and what is typically involved with a valuation. By the end of this article, you should have a much better idea of what goes into finding the value of a business.
What Does a Business Valuation Cost and What Does It Include?
The answer to both of these questions is not entirely straightforward. The answer, in summary, is “It depends who’s asking, and why they want to know.” The gray area emerges because there are two main categories of valuations, those that are certified and those that are not certified.
A certified valuation is performed by a credentialed business appraiser. There are a few different organizations that provide qualifications. Qualified appraisers will have at least one of the following certifications:
- Accredited Senior Appraiser (ASA)
- Certified Business Appraiser (CBA)
- Certified Valuation Analyst (CVA)
- Accredited in Business Valuation (ABV) of the AICPA
Whether you need a certified appraiser depends on the purpose of the valuation. There are some instances where you need to go through a certified valuation process, including when it:
- Involves the IRS
- Is necessary for litigation, including both civil or criminal court cases
- Is required for retirement based on stipulations set forth under the Employee Retirement Income Security Act of 1974
If you do not need a valuation for one of these reasons, then you may not need to pay for it to be certified. Certified valuations are considerably more expensive than non-certified valuations. The starting point for a certified valuation is around $5,000, but they can be as expensive as $25,000, depending on the complexity of the business valuation.
For instance, if the business appraisal includes pricing intellectual property, then it’s going to cost more. Valuation professionals can provide a much better idea of what the analysis will cost you once you speak with them and explain the purpose behind getting the valuation.
If you’re a small business owner looking to sell, and you’d like to know how your business stacks up against similar companies, then an uncertified valuation should do the trick. Even if uncertified, the business valuation report should give you a better understanding of whether now is the right time to sell your business.
The report would also be useful if you are trying to figure out what potential buyers would pay. As we mentioned previously, this can help bridge the valuation gap. For instance, if you think you would like to sell your business for $10 million, but comparable companies are only going for a purchase price of $7 million, then you have a bit of work to do to increase the value of the business.
Basically, an uncertified valuation should provide you with a barometer of where your company stands compared to similar businesses. Uncertified valuations by an M&A professional typically range from $2,500 to $5,000.
There’s a third type of valuation to be aware of — those that are free. These are technically uncertified valuations, but they deserve their own category because business owners need to understand the pros and cons.
Some business brokers will offer free valuation services to prospective clients. This is often a sales ploy to try and get the business owner to sign a year-long contract allowing them to sell the business. Signing on with these brokers when you’re not ready to sell can have a long-lasting impact on your company and can cost you tremendously in future potential earnings.
Additionally, there are business valuation calculators online, available for free or otherwise very cheap. Though they can possibly provide a valuation that’s in the right ballpark, it’s much more likely that the number will be off. A false valuation can end up forcing owners to work harder unnecessarily or to take their foot off the gas prematurely. Receiving an incorrect quote is probably not worth the risk.
In summary, you get what you pay for when it comes to valuations. Your thought process when it comes to valuation should be one of diligence and accuracy. Even if you don’t need to spring for a certified valuation, you should consider paying for an uncertified valuation to gain a better understanding of where your company stands compared to your competition.
Why Is a Business Valuation Important?
A business valuation is important for a few reasons. If you’re receiving a certified valuation, it may be required. For instance, the IRS may require a valuation for tax purposes, or you may have been court-ordered to have a valuation performed.
However, if you’re electing to receive an uncertified valuation, you may be questioning why paying a couple of thousand dollars is worthwhile. The answer is that – when used as a management tool – it can have a significant impact on future cash flows. Your valuation report should dictate future business decisions and will be a driving force behind some of your most important upcoming choices.
Consider the fact that people are willing to pay a stock broker to manage the assets in their retirement account. A broker’s fees often range between 1% and 3% of the value of the assets they manage per year.
If you own a business, that business is typically your biggest asset. Yet owners often don’t want to pay for a valuation. Using the stock broker analogy, if you own a business that is worth $5 million, you should be willing to pay a valuation expert at least $50,000 (1%) per year to get insights into the value of your biggest asset and allow you to make more informed decisions. A business valuation costs much less than that. In short, when used correctly, a business valuation should be a value driver for your company.
What Is Typically Involved in a Business Valuation?
The reality is that a business valuation is not just a financial exercise where you plug numbers into a spreadsheet and run a series of calculations. A quality valuation requires more than looking at your financial statements and balance sheets. It takes a lot of firsthand knowledge to understand how real-world buyers value a business. It can very much depend on the type of business you own and the industry you work in.
At Allan Taylor & Company, our business valuation method involves asking owners a series of 52 questions to gain a better understanding of who they are as a company. And more questions follow as we look to better understand their operations.
We view it like peeling back the layers of an onion. You can’t just look at three years’ worth of financial reporting and come up with a number. A comprehensive valuation only serves to help business owners, providing them with a much better understanding of where their company stands relative to market competition.
Invest in Your Business With a Business Valuation
At some point, you will likely need a business valuation for your small business. When the time comes, you should recognize that getting one is an investment for your company. If you need a certified valuation, you likely don’t have much choice when it comes to costs since it’s out of necessity.
But, if you are choosing an uncertified valuation, you may find yourself wondering whether the couple of thousand dollars is worth it, especially when there are free options available. Free valuations come with a lot of stipulations. They can be very inaccurate and can require you to sign on with a broker long-term, which may not be the best business move.
Paying a couple thousand dollars for a comprehensive valuation is well worth your while. The price is likely a small fraction of your revenue, and it can provide you with valuable insight that you can use to make more informed business decisions.