11 November 2024: Purpose of a Business Valuation Pt 2
Last week’s post – Part 1 of this two-part series – looked at five situations in which a business valuation is important. This week, we examine six other purposes for such valuations.
WHAT WE’RE LOOKING FOR: Frozen Food Manufacturer: Vegetables and meats. 30k – 100k sf w/fry line and spiral freezer. Revenue: $20; U.S.
in**@Wo**********************.com
Owner (shareholder/member) Disputes and Litigation: In situations where conflicts arise among owners – such as during divorce proceedings, partnership disputes, or business dissolution – a business valuation becomes essential. It provides an objective basis for resolving conflicts over ownership stakes and distribution of assets. Courts often rely on independent valuations to determine fair settlements. In addition, businesses may engage in valuations to prepare for potential litigation or to understand the financial implications of legal disputes.
While all that is true, deciding to determine your businesses worth while in the throes of raging acrimony, guarantees even more animosity among the owners. Imagine trying to find agreement on who will perform the valuation, solving the inevitable dispute over the valuation and the cost of legal fees, multiple valuation firms, arbitration proceedings, etc. – just to reach an agreement on the business’ value, a number that, at this juncture, neither party is happy with.
Regular valuations, done when there is harmony among the owners, avoids all that and saves a ton of dough in the long run.
Tax Compliance and Planning: Valuations are also critical for tax compliance and planning purposes. Business owners may need valuations to determine the fair market value of their business for estate planning, gift taxation, or other tax-related matters. Accurate valuations can help minimize tax liabilities and ensure compliance with regulations. Furthermore, businesses undergoing significant changes, such as restructuring or reorganization, may require updated valuations to reflect their new financial circumstances and tax implications.
__________________________________________________________________________________
Are you a business owner? A Realtor? A business broker? Are you looking for a business to buy? Do you have questions about the selling or buying process, the valuation, marketing the business, deal structure, financing or some other business issue?
You can find the answers in The Brokers Roundtable℠. Join seasoned business brokers, commercial real estate experts, valuation specialists, financing professionals, attorneys, accountants and all the other talent associated with what we do.
Sign up for a 90-day test drive at The Brokers Roundtable℠. Access the talent – or just see what’s going on in our industry!
___________________________________________________________________________________
Strategic Alliances and Joint Ventures: When businesses consider forming strategic alliances or joint ventures, understanding each party’s value is crucial. A thorough business valuation helps in negotiating equitable terms and understanding the potential synergies that can be achieved through collaboration. By evaluating the strengths and weaknesses of each entity, stakeholders can create a more effective partnership, aligning their objectives and maximizing the potential for success.
Market Positioning and Competitive Analysis: A business valuation can provide insights into a company’s market position relative to its competitors. By analyzing the valuation of peer companies, business leaders can assess their own competitive standing and identify areas for improvement.
Such comparative analysis can inform strategic decisions regarding pricing, product development, and marketing efforts, allowing businesses to adapt to market changes and stay ahead of competitor
Insurance Purposes: Businesses often require valuations for insurance coverage, particularly when it comes to protecting assets against risks such as loss, damage, or liability. Accurate valuations ensure that businesses are adequately insured, helping to mitigate financial risks in the event of unforeseen circumstances. Valuations can also assist in claims processes, providing a basis for settlement negotiations in the event of a loss.
An excellent example from our own files on this insurance issue is a real eye-opener. This is an excerpt taken from an article we posted some years ago. (The full article can be accessed here.)
“One of our clients is a nicely profitable service business started by four unrelated partners about eight years ago. One of the partners was killed in a tragic accident about four years after the business started.
That partner had a slew of heirs, none of whom had any business sense and few of whom even had any common sense. If, at the very beginning of the business, the partners had not included a buy/sell agreement as part of the corporate documents and funded that agreement with life insurance policies covering each of them, the heirs would have been spilling Big Gulps on the conference room table at the next board meeting. Fortunately, such an agreement – and the associated insurance – was in place describing exactly how the deceased partner’s share of the business would be valued and over what period of time the estate would be paid.”
Our client was growing rapidly and the valuation of the company was doing likewise. A $1 million policy on each of the owners in one year was manifestly inadequate the next. Their bankers knew this and required regular valuations so that the insurance the company carried was sufficient to cover the possibility, albeit remote, that the worst would happen. It ultimately did.
Succession Planning: Succession planning is a strategic process that ensures the continuity and stability of an organization by identifying and developing internal talent to fill key leadership roles when they become vacant. It’s a critical element of long-term organizational success, enabling businesses to navigate transitions smoothly and maintain operational effectiveness.
__________________________________________________________________________________
Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
Succession planning is essential for business continuity, especially for family-owned enterprises. A business valuation can help in identifying the appropriate value for the business when transitioning to the next generation or a new leadership team. It assists in establishing a fair buy-sell agreement and ensures that all parties are on the same page regarding the business’s worth, which is crucial for maintaining family harmony and business stability.
Unsolicited Offers and Hostile Buyers: What would happen if someone – perhaps us – shows up and says, “we’ve got someone looking for a business like yours.”? Would you even know how to respond?
This happened to me about 25 years ago. I was totally unprepared on two crucial fronts. One, I had no idea what my business was worth and, 2) I had no plan for life after selling. The second issue was recoverable. The first, less so.
The Bottom Line
A business owner not knowing what his or her business is worth – nearly always their largest and most valuable asset exposes themselves to numerous risks that such ignorance can engender. The savings in costs and aggravation that result from having periodic valuations performed is rarely considered – until something happens that underscores a valuation’s important, and at that point, it’s almost always too late.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
NOTE TO READERS: Our “Searching For…” feature has been moved to our online community, The Brokers Roundtable℠. It will appear there exclusively.
#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions #buyabusiness #sellabusiness #realtor #realestateagents
The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com