Advisory

A guide to business valuations

Even if you have no immediate plans of selling, a valuation is a vital step in planning for the future of your business.

What is a business valuation? 

A valuation estimates the fair market value of your business, capturing what it may sell for if it were to go on the market.

Why is it important for a business to be properly valued?

A proper business valuation helps owners understand their company’s health by identifying value drivers and detractors that would affect its price if it were placed on the market. This can be valuable for any business, providing the foundation for strategic and operational recalibration to enhance the company’s fitness and drive future growth.

Getting a valuation can help you establish an action plan to address potential risks and take advantage of opportunities you may not have identified otherwise, so you can look to get the best value down the road if you decide to sell your business. It’s also suggested to establish an understanding of your business’s value in the first stages of succession planning, as this knowledge is not only a key factor affecting the timing and viability of succession, but it’s also required for tax, estate and insurance planning purposes.

When would you need to get a business valuation?

There are some misconceptions that getting a business valuation always occurs as the precursor to a sale. In fact, most valuations happen when the business owner has no immediate plans of making an exit. There are plenty of situations in which a proper business valuation can help you better navigate complex processes related to tax and corporate structuring. There are also personal reasons why you might consider a valuation, such as succession planning, divorce or estate planning.

Here are just a few contexts in which a business valuation would be a good idea:

Tax and succession planning

Tax planning for your business is something that can be done at various times – and having an accurate valuation of your business can be essential to the process. For example, if you own a family business, you might look into establishing a trust so family members can each be shareholders in your business in order to take full advantage of capital gains tax exemptions if the business is sold.

Similarly, when starting – or refreshing – a succession plan for your business, it’s important to have a record of its fair market value as you map out the process of transferring ownership and control.

Change of corporate structure

When bringing in and/or exiting partners or shareholders, you’ll need to accurately value their shares. Conducting an arm’s-length assessment in the form of a business valuation can be a good starting point for avoiding conflict in this process. This is especially important in potentially litigious situations.

Employee stock options

To retain key employees or attract new ones, you may be considering creating a stock option plan where employees are allowed purchase the shares of company stock at a predetermined price. To initiate this plan, you’d need a valuation to set that share price.

Change of family situation

A divorce proceeding typically involves a division of assets, but what happens if one of those assets is a business one or both of you owned? Unlike a home or savings account, the value of business is more difficult to agree upon. In situations like this, an arm’s-length valuation can ease any potential pain points and look for an equitable division of assets

Business “health check”

Regardless of whether you’re planning any big changes in the near future, it’s best practice to periodically conduct a “health check” of your business. Conducting a valuation can identify risks and help you set a plan for mitigating them. A valuation can also identify opportunities for new efficiencies. By identifying and addressing opportunities for improvement early, you’ll be in better shape down the road.           

Knowledge is power

Understanding the value of your business equips you to better handle changes and transitions, both planned and unplanned. Whether you’re preparing for your business’s long-term future or looking for ways to take it to the next level now, a proper business valuation performed by an expert business advisor can help you get there.

Your Grant Thornton advisor can help you uncover the value of your business by analyzing the predictive nature of historical cash flow, assessing the inherent risks of a business and helping you understand how to apply the insights from your business valuation.