A business valuation is an estimate of the economic value of a company at a certain point in time. While it is always a good idea to know roughly what your company is worth, there are key points where an accurate valuation may be needed, such as during the sale of a company, during shareholder or partnership disputes, and for estate and tax planning purposes.
While many owners have a number in mind when they estimate their business’ worth, the reality is that this number may be inflated due to personal attachments or an emotional connection to the company. And even if the number is close to market value, others may perceive a bias. Therefore, an objective business valuation is often required from a third party.
The valuation process may incorporate different methods for determining a company’s value. A few methods used for a business valuation are:
- Multiples of Private Market Comparables
- Adjusted book value
- Capitalization of benefits
- Excess Earnings
Each of these methods requires diligent gathering of data and expertise in understanding the intricacies for computing the calculation. Specifics such as what should and should not be included while understanding the standard and purpose of the valuation drive overall inputs into the calculation.
Business valuation can be incredibly complex, accounting for the current economic climate, market conditions, and interest rates, among an assortment of other factors creates constant change in the underlying value of the business. Experts who specialize in objective valuation are accredited as a CVA (Certified Valuation Analyst) or ABV (Accredited in Business Valuation) by the AICPA.
In many instances, the professionals are either Certified Public Accountants (CPAs) or CVAs who specialize in the calculation of the value of companies. They have either the ABV certification issued by the American Institute of Certified Public Accountants (AICPA) or the CVA certification issued by the National Association of Certified Valuators and Analysts (NACVA.) The certification process requires candidates to complete the application process, pass a standardized exam, meet the minimum Business Experience and Education requirements, and complete ongoing continued professional education.
This objectivity and professionalism are critical since valuations can often play a role in many significant company events that can profoundly impact the company’s financial circumstances and the finances of owners or shareholders.
Valuations are most commonly sought during the following events:
- A sale or merger: Business valuations are vital during the sale or merger as they are used during negotiations. They can also be used as a benchmark for partners to buy in or sell out of a company.
- Litigation: Valuations are often required for any owners when a divorce is in process, as they are central to divorce proceedings. In addition, valuations are crucial in partnership disputes.
- Tax and succession planning: Business valuations can determine tax liabilities and aid in planning for retirement.
- Strategic planning: Valuations can also be used to secure additional capital and help owners understand growth and profit drivers. This information can help make educated strategic planning decisions.
To learn more about business valuations and how they can help your company, contact Shuster & Company, PC, today!
A full-service Certified Public Accounting Firm located in Denver, Shuster & Company P.C. provides quality, personalized financial advice and guidance to individuals, businesses, and the legal community. We offer an extensive range of services, with emphasis in forensic accounting, business valuation, and litigation support.