10 Things to Know About Business Valuation

May 28, 2021
10 Things To Know About Business Valuation, Business Owner

1. What is a business valuation?

A business valuation is a valuation by a certified appraiser of the equity ownership of a business. Appraisals can be used for different reasons, from preparing to sell the business to gift tax support.    

2. Why are business valuations needed?

The reasons to obtain a business valuation fall under the following categories:

  • Transactions: Exit planning, buy-sell agreements, ESOPs, equity financing  
  • Tax Reporting: Gift and estate tax, charitable donations, c-to-s conversions
  • Financial Reporting: Purchase price allocations in acquisitions, goodwill impairment testing, portfolio valuations, derivatives
  • Litigation: Marital dissolutions, shareholder disputes, economic damages

3. How do business appraisers determine value?

  • Income Approach: Weighs the expected benefits from investing in the company against the required return for assuming the risk associated with it. This approach accounts for projected changes in revenue, profits, working capital needs and capital expenditures.
  • Market Approach: Values a company based on similar publicly-traded companies and sale or merger transactions of comparable companies.
  • Asset Approach: Measures the fair market value of a company’s assets, less its liabilities. Frequently used for underperforming companies, this approach is not appropriate for companies with meaningful profits and intangible assets.

4. Is the date of a business valuation important?  

A business valuation is the estimated value of a company at a specific point in time. As with any equity investment, the value of a company will change over time due to internal and external factors. Therefore, an updated business valuation will be required for proper support at future dates.  

5. Can a business have more than one value?

Yes. A business can have multiple values at a single point in time. Value estimates reflect what a buyer and seller would likely agree to in a transaction. As such, a business may have a lower value to a buyer with no synergistic benefits versus a strategic acquirer that could realize greater benefits. In addition, majority ownership of an entity is inherently more valuable than a minority position that lacks control rights and stock marketability.

6. What is USPAP? What are business valuation standards?

In addition to standards set by organizations such as the Institute of Business Appraisers (IBA) and American Society of Appraisers (ASA), qualified business appraisers follow the Uniform Standards of Professional Appraisal Practice (USPAP). This is recognized as the official source of appraisal standards in North America. Adherence to standards reinforces a business appraiser’s expertise and the credibility of his or her work. Appraisers who fail to perform their work in accordance with USPAP standards may be subject to criticism and may have difficulty defending their conclusions in litigation.

7. How do I judge a business appraiser’s qualifications?

Professionals in varying occupations may claim to be business appraisers, but only accredited business appraisers have the training and expertise needed to provide defensible business valuation reports. There are several designations such as; the Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), Certified Valuation Analyst (CVA), and the Accredited in Business Valuation (ABV) of the AICPA. 

8. What information is needed to perform a business valuation?

The following documents are necessary to provide a credible valuation: financial statements for the last five years, interim financial statements and forecasts or projections. Other documents requested include information that describes the company’s services and/or products, operations, customers, suppliers and competitors. Any business planning materials including reports by consultants are also required.

9. What else can owners use a business valuation for?

Valuations provide business owners with useful information relative to measuring risks and comparing financial performance to its peers. By identifying key value drivers, business owners can use valuations as a tool in long-term planning to enhance the operational and financial performance of their companies.

10. How much does a business valuation cost?

Depending on the scope of the valuation, a business valuation can cost anywhere from $7,000 to more than $20,000. Most certified business appraisers quote a project fee.

Business Valuation Services

Learn more about our business valuation services here.

This article is limited to the dissemination of general information pertaining to Mariner Wealth Advisors’ investment advisory services and general economic market conditions. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. Any opinions and forecasts contained herein are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. You should note that the materials are provided “as is” without any express or implied warranties. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

Mariner Wealth Advisors (“MWA”), is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply a certain level of skill or training.MWA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which MWA maintains clients. MWA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MWA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website. Please read the disclosure statement carefully before you invest or send money.

Contact Us