Business Valuation

BUSINESS VALUATIONS: WHAT THEY ARE AND WHY YOU NEED ONE?

To put it simply – a business valuation determines the economic value of a company. This process is used to determine how much a business is worth, based on an estimate by an unbiased third party.

Estimating the value of a business is both a science and an art. There are several formulas and models that can be used, but ultimately the valuation results depend on many factors.

A business valuation can include an analysis of a company’s management, its future earnings prospects, its capital structure, the market value of its assets and so much more.  Also, the value of a business is impacted both by what a business is able to do in the future and what it has done in the past.

Why Do I Need a Business Valuation?

There are many reasons to have your business valued. Sometimes it’s a necessity, such as when you are determining the value of your business for estate planning reasons. Other times it’s for a proactive reason, such as helping you understand your business better and plan for the future. Here are a few of the major reasons to get a business valuation:
01

Succession Planning

An accurate business valuation is essential for succession planning. Passing down your business will include several complicated issues, such as how to allocate value and tackle tax issues. You’ll want a thorough valuation so you can assess your company’s financials and determine its position in the market.

02

Estate & Gift Taxes

A business valuation might be necessary not just to file an estate tax return, but to provide guidance to a personal representative when fulfilling the terms of a will. If you are effecting a gift to minimize your estate tax, this will often require the valuation of your business.

03

Buy/ Sell Agreements

Business valuations might also be necessary for businesses to develop buy/sell agreements. These types of agreements may be important for tax or business purposes. A buy/sell agreement will allow the owner of a business to acquire the interest of another owner - if the owner passes away or decides to retire.

04

Mergers & Acquisitions

A business valuation is absolutely essential for mergers and acquisitions. Many business owners are uncertain (or unrealistic) about what their businesses are currently worth. It’s crucial to use an objective, transaction-based method of estimating the fair market value of your business.

05

Divorce

If you are a business owner going through a divorce, a valuation of your business may be required in order to divide up the marital estate. Sometimes both sides will obtain separate valuations, but in many cases there may be a collaborative divorce where both parties work together with a single analyst.

06

Insurance Purposes

A business owner might also get a business valuation in order to determine the value necessary to over their business interest value if anything happened to them. This is known as “key person” insurance and is paid out to the owner’s family to allow them to continue the role or buy themselves out of that role.

FAQ's About Business Valuations

There are many different types of business valuations out there. Each one is slightly different and the best one for you will depend on the type of business you have and what your objectives for getting the valuation are. For example, some of the different types include asset valuation, owner benefit valuation, capitalization of income valuation and market valuation. Not sure which one is right for you? Contact us and we can help.

At Sigma we pride ourselves on a valuation model that is proven to provide excellent results to sellers. While each business valuation does require different information, typically we look at your historical records, including your business tax returns for the last three years, your interim profit and loss statement, your average value of inventory of saleable product, your equipment list and your lease information. We also look at any real estate appraisals that are available, if real estate may be included in the sale. In addition to this, we will also look at up-to-date comparable statistics from our own sales and transactions - as well as those from other brokers across the country. But that’s not all - once we have assessed the value of your business we will also provide you with actionable steps you can take to make your company more attractive to potential buyers and increase its value.

To put it simply, fair market value is an estimate of the market value of your businesses. In other words, what a willing, knowledgeable and unpressured buyer would likely pay to a willing, knowledgeable and unpressured seller in the market.

Here are some of the important steps you can take to prepare for a business valuation:
● Determine why you need a business valuation, as the approach to the valuation will depend on why you are having your businesses assessed.
● Gather the important documents required for the business valuation. You’ll need well-documented financial statements and tax returns in order to demonstrate the earning power of your business.
● You’ll also want to provide a customer list to show where your business gets its revenue. (If your business has many customers rather than a few large customers, it will command a higher selling value.)
● It’s also a good idea to conduct market research so you have a better understanding of your industry before you sell your business.

 

When it comes to evaluating the assets of your business, you’ll come across both tangible and intangible assets. Tangible assets have a physical existence and can be felt and touched. This could include buildings, furniture, computers, equipment, vehicles, etc. Intangible assets are those that cannot be felt or touched. Some examples include patents, trademarks, the brand name, customer data, social media presence, etc. It’s much harder to determine the value of an intangible asset. However, sometimes an intangible asset can be much more valuable to the potential worth of the company.

Business Valuation Options

Free Market Approach

Are you looking for a professional firm to list and sell your business? We can help. The Free Market Approach package includes a valuation of your business for the purposes of considering a business sale, and our expert support throughout the selling process.

Fee-Based Market Approach

Looking to partner? Have your own buyer? Just need our help with the valuation? This is the option for you. The Fee-Based Market Approach gives you a market valuation fo your business. Our fee for this package is based on the size of your business.

Certified Business Valuation

Need a business valuation for estate planning or IRS purposes? This option is specifically suited for these situations. A Certified Business Valuation provides you with a detailed analysis designed to hold up against the most intense scrutiny. Our fee for this package is be based on the size of your business and the purpose of the report.

A BUSINESS VALUATION MODEL INFORMED BY PERSONAL EXPERIENCE
Because we’ve created, bought and sold our own businesses, Sigma’s professionals have personal knowledge of the blood, sweat and tears that go into building a successful business. We’ve also helped hundreds of business owners successfully sell their businesses. This combination of experiences led to the development of our valuation model—one which helps you to achieve top dollar while increasing the chances of a quick sale.

Sigma’s Valuation Model: Transparent and Proven

Sigma prides ourselves on a valuation model that is proven to provide stellar results to sellers while providing complete transparency during every step of the process.

  • Clear methodology: Many business brokers have a mystery formula they use to perform a valuation, presenting you with a final number but providing very little insight into how they came up with it. At Sigma, we take the time to explain how we came to our valuation, addressing any questions or concerns before the sales process starts.

  • Comparable statistics: Your business valuation benefits because our valuations are based on real numbers, not best guesses. Thanks to our extensive business sales experience, we’re able to access up-to-date, comparable statistics from our own sales and transactions and those from other brokers across the U.S.

  • Accuracy of value: When we give you a valuation, you can count on it being on target. In fact, our valuations are typically accurate within 5% of the business’ final selling price, meaning that the business routinely receives offers and sells for an amount that is within 96% or more of our valuation.

  • Advice to increase value: Sigma’s brokers have collectively sold more than 500 businesses and have seen what qualities and characteristics have a big impact on increasing or decreasing value. We’ll provide you with actionable steps that will make your business more attractive to potential buyers while increasing its value.

Interested in getting a realistic business valuation for your Dallas, Texas, Fort Worth, Texas or Oklahoma based business? Fill out our Business Valuation form to schedule a free consultation and business valuation.

Preparing for Your Sigma Business Evaluation

Ready to meet with one of Sigma’s professionals to gain a valuation of your business? Though your paperwork isn’t the only thing we’re interested in, it’s still necessary. Here’s a quick list of items you’ll need to bring with you: