ARTICLE | August 22, 2024

Understanding the value of your company is essential for every business owner. Business valuations not only provide a clear picture of your company’s worth but also empower you to make informed decisions, plan for future success, and ensure the lasting legacy of your business. Here are just a few examples where a business valuation may be both necessary and beneficial:

Ownership succession:

When owners of a company wish to transfer ownership to the next generation in preparation for retirement or starting a new chapter, a business valuation can provide a beneficial starting point to determine the business’s worth and strategically plan for the future accordingly.

Buy/Sell agreements:

Business valuations can be used for the purposes of selling or purchasing a business. Both the buyer and seller can use a business valuation as a strategic tool when determining if a sale or purchase is worth the sale or the investment.

Gift/Estate Taxes:

Estate planning and gifting are common reasons for needing a business valuation. By knowing the value of a company, you can plan ahead and gift interests in your business. If an owner wants to gift a portion of their business, a business valuation is critical to ensure the appropriate amount of tax is paid based on the Company’s fair market value at that time, if any. Business valuations are essential for estate tax planning purposes allowing business owners to strategize and help reduce or minimize estate taxes.

Approaches to Consider:

There are many key factors that are taken into consideration and the purpose behind a business valuation plays a significant role. The three approaches and methods that a business valuation analyst considers include:

Income approach:

Cash flow is a key indicator of the value of a business and is a key driver in the valuation outcome. It is important to understand what kind of cash your business is generating. The income approach is used typically for businesses that are focused on generating future cash flow and earnings in excess of a reasonable rate of return. Overall, the greater the projected growth of your company, the higher the value; the greater the risk of your Company, the lower the value.

Asset/Cost approach:

The asset approach is used when a company is asset-intensive or if there is intent to liquidate assets. It is important to know the amount of cash that would be left over to owners if all assets were sold, and all Company debt was paid off.

Market approach:

What does the marketplace say that the business is worth? The market approach is used when comparing your business to similar publicly traded businesses, or recently sold businesses. This approach is used to determine the value based on comparable public companies.

For questions or assistance, please contact Bethany Andrew, CPA/ABV and Partner at Larson Gross at 800-447-0177.