What is Your Business Worth? An Insight into Business Valuation

Matt Goss, CPA/ABV

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As a business owner, you’ve likely invested significant time, effort, and resources into your venture, but do you truly know what it is worth?

Understanding the value of your business is a critical step in succession planning, strategic decision making, tax planning, and the potential sale of the business. Here we discuss the why’s and how’s of business valuation, exploring why it’s not just beneficial, but essential for every business owner to know the true value of their business.

The Need for Business Valuation

Common reasons a business valuation is needed include:

• Succession Planning – Knowing the value of your business is the first step in understanding what comes next for your business.
• Sales and Divestitures – If planning to sell all, or a portion of your business, it is crucial to understand what that business might be worth.
• Gift and Estate Tax Planning and Compliance – To ensure compliance with the IRS, an accurate, defensible, and documented value is necessary.
• Buy/Sell Agreements – Understanding business value can be a starting point for agreements between parties to buy/sell stock in the business. 
• Shareholder Buyouts and Disputes – Ownership disputes can arise from many circumstances and understanding the value of your business is key to navigating through tough negotiations. 
• Management Tool to Increase Value – Business valuation can also be used as a management tool to identify ways to increase the business’s value.

Methods to Value a Business

The methods to value a business can vary tremendously based on the business being valued, the industry it operates in, and the nature of its operations. Many factors are taken into consideration by the appraiser and often not, just one method will be used to understand the business’s value.  The three most common methods of valuing a business include the income approach, the market approach, and the asset approach. 

• Income Approach – This method primarily focuses on the anticipated future benefit of the business. It involves converting an expected future benefit stream, typically cash flows or EBITDA (earnings before interest, taxes, depreciation, and amortization), into a present value using a suitable discount rate. This method aims to estimate the present value of future earnings, considering factors like projected growth and risk levels.
• Market Approach – This approach values a business based on similar public company values or the actual selling price of similar companies in the market. This method often compares the subject company to derived pricing multiples to determine value.
• Asset Approach – This approach is based on the fair market value of a company’s assets and liabilities. This method calculates a company’s equity value as the difference between the fair market value of its assets and liabilities. This method is often used in asset intensive businesses or holding companies where income streams do not adequately capture the value of the business.

Summary

Understanding the value of your business is complex. By familiarizing yourself with the common methods of business valuation, you can gain a clearer picture of your business’s worth and strategically plan for its growth and future. The value of your business goes beyond numbers. It’s a reflection of your strategic decisions, operational efficiency, and overall business health. If you have any questions on what your business may be worth, reach out to your trusted Louis Plung & Co. advisor or email us at [email protected].