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:
1. Succession PlanningAn 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.
2. Estate & Gift TaxesA 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.
3. Buy/ Sell AgreementsBusiness 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.
4. Mergers & AcquisitionsA 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.
5. DivorceIf 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.
6. Insurance PurposesA 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
Business Valuation Options
Free Market Approach
Fee-Based Market Approach
Certified Business Valuation
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:
- Federal tax returns for the last 3 years
- Interim Profit and Loss Statement (P&L), including balance sheet
- Profit and Loss Statements (P&L) for the last 3 years, including balance sheets
- Average value of inventory of saleable product on hand at any time of year
- Equipment list
- Lease information
- Copy of any real estate appraisal that is available; if the real estate may be included in the sale