Ever wonder what your business is worth? A detailed and comprehensive Business Valuation Report can help you sell or refinance your business.
Business Valuation
Ever wonder what your business is worth? A detailed and comprehensive Business Valuation Report can help you sell or refinance your business. A solid business valuation can give you a solid range of values ranging from a low, medium, and high valuation dollar amount.
This blog will be a brief overview of how a business valuation works as well as an overview of the Income Approach, the Market Approach, and the Asset/Cost Approach. Finally, I’ll discuss how owners can use a business valuation to assess the current value of the company as well as plan the future direction of the company.
Valuation is a mixture of both art and science. A Business Valuation Report is a statement of opinion of value supported by hard numbers, informed by current market conditions, and supported by the knowledge and experience of the Business Valuation Team.
How does a Business Valuation work?
First, we gather historical and current financial statements and tax returns. A backup of the QuickBooks or similar accounting software used to generate the financial statements is very helpful in determining a Business Valuation.
The next step is to gather the supporting documents that are needed in addition to the data contained in the software and tax returns. Generally, a good accountant is very helpful in locating the documents needed in this case. Experience shows that many business owners often don’t have the documents organized and named properly.
Once the Financials, tax returns, and supporting documents are located and organized, the accounting firm that is doing the Business Valuation adjusts the financials to more closely reflect the valuation which is being developed.
Some of the adjustments are prepared using industry ratio analysis and other forms of empirical aggregate data that specifically applies to your company and your industry.
The firm then looks at the business valuation in another way using the Income Approach. This approach allows the valuation accountant to convert the projected future income stream into a net present value. The income approach uses a discounted present value of future cash flows.
The Market Approach, is also used to value your company comparing your company to other companies in the same industry, of the same size and in the same geographic region.
Finally, the Business Valuation team uses the Asset/Cost Approach to valuation. This approach calculates the value of the company’s tangible and intangible assets and liabilities to determine value.
Once the Business Valuation team correlates the Income, Market, and Asset Approaches to valuation, they are then ready to issue the Business Valuation Report.
The Business Valuation Report is the work product which contains business advice as well a business valuation. The Business Valuation Report is an excellent planning tool for the business owner to make big picture strategic decisions about the future direction of the company, as well as an informed expert opinion of the current company value.
A well done Business Valuation Report can help owners plan for future product offerings and expansion as well as the investment capital to achieve those business objectives.
As a final important note, an onsite visit is required for a Business Valuation to be IRS compliant. The on-site visit is required to match key parts of the data presented in the financials and supporting data. The on-site visit is not an audit, but has a similar objective as an audit. The on-site visit should be performed by a CPA or other highly skilled financial professional.
In summary, a professional business valuation report incorporates an analysis of current and historical financials as well as other empirical aggregate data using the Income Approach, the Market Approach, and the Asset/Cost Approach. To be IRS complaint, the business valuation approach must include an on-site visit by a business valuation professional. All of this data acquisition and analysis results in quality business valuation which can be used to assess the current value and plan the future direction of the company.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.
About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.
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