Do you need a business valuation for your small business?  You might need the business valuation for Estate and Gift business taxes, possible business sale, or a host of other reasons.

The business valuation is going to tell a story about your business.  This story will contain a narrative backed up by statistics, facts, and figures.  This story must make sense when it is complete.  Your job as a business owner obtaining a valuation is to make sure the story, facts, and figures are clear and sensible to the experienced valuation professional evaluating the business.

To make sure you know that you need a business valuation, and to make sure it is the most valuable process for the time, effort and energy that it will entail, below are some steps to consider.

THE 5 STEPS:

1. Be able to explain why your product or service is so desirable you can continue to make a high profit
   The most important thing in valuing your business is understanding how you create and keep a list of customers that will generate enough revenue that you can be expected to continue making a profit. Do you have a patent that prevents others from selling similar products?  Do you have a unique business model that generates cash flow?  Do you have strong internal systems and great employees?  These factors are the core of the business valuation.  How your business makes money and how it will continue to do so.  The ability to clearly and succinctly explain that is key to the valuer understanding your business and getting the valuation correct.
2. Have quality financial information 
   You must have quality financial information. A business valuation, for the most part, is a summary of your past financial results and a projection of your future financial expectations.  Without clear and accurate data, it is very difficult to analyze the details necessary to make correct assumptions and calculations.  In addition to historic financial information, business plans and useful projections will add to the valuer’s understanding of the business.
3. Have leases and major contracts in good order 
   Leases, customer contracts, loan documents, and other legal documentation may not make a business profitable, but if they are not in good order a business may suffer major losses quickly.  These documents in good form reduce risk which increases the value of the business.  Having major legal documents that your business relies on updated and accessible is important for valuing the business.
4. Have systems outlined and resumes of key people 
   Simply put, a business is a series of systems that produce a product or service, ideally at a profit.  Most businesses have many systems that are run by people.  True high-quality systems are where “normal people obtain extraordinary results every time.”  This requires great systems, great training, and very good people.   Make sure you can document all of these.
5. Hire an experienced valuation professional. 
   Clearly, the valuer must have the background to understand how actual businesses on the ground work and how that translates into value. Business valuations are performed for specific purposes – potential sales, ESOP structuring, divorce, as well as for estate and gift tax purposes.  While it may not be widely known, the fact is that the purpose of a valuation can often significantly change the correct business value calculated.  Make sure the valuer understands and has performed valuations for your purpose.  Finally, make sure they have sufficient background and training in the fundamentals of business valuation.

These five steps will help lead to a consistent well-run business and the optimum value when obtaining a business valuation.  Business valuation does have an element of the old saying, “garbage in – garbage out.” As a business owner you do play an important role in obtaining a proper business valuation.

Please let us know if you are interested in discussing a business valuation further. Our team is happy to help answer any questions you may have or to discuss your small business in more detail. Contact us today!