Why is a Business Valuation Necessary?

One of the best reasons for obtaining a business valuation is to use it as a management tool.  A prime objective for all business enterprises is to improve and maximize its value to the owners.  A properly prepared business valuation provides management with insightful information that helps identify company strengths and weaknesses that affect value, allowing them to more effectively focus their energies in places that really count.

A periodic business valuation also serves as a measurement tool to help owners assess overall success and management effectiveness.  The National Association of Certified Valuation Analysts, the nation’s leading organization supporting the business valuation discipline, recommends a valuation of a business enterprise be performed every two years for management purposes, if for no other reason.

Can the Value of Privately-Held Companies be Determined by Comparison With Publicly Held Companies?

 Generally, no - for two reasons.

1.       There usually isn’t a ready market for investors to buy stock in a private company.  Because of this, the valuator will often apply a “lack of marketability discount” to adjust for the cost required to take a company public and/or sell the business through a broker.

2.       There is a greater risk in ownership or investment in smaller companies, which privately held companies typically are.  Thus, the expected rates of return used by a prospective owner or investor to value a privately held business are typically higher.

Can I Use Rules of Thumb to Value My Company?

Rules of thumb are formulas based on industry averages of companies sold, using their sales price compared to either annual sales revenues or profits.  As such, the actual sales price of an individual company is either higher or lower than the average.  Rarely does it fall right on the average, so results will be misleading.

The purpose of a valuation affects the methodology and the underlying assumptions used.  The value determination for a company offered for sale, for example, will be different than the value determination for the same company for the purposes of a divorce or estate tax calculation.

In short, rules of thumb have only limited application, generally as a “sanity check”.  Most closely held companies have enough unique value drivers to render any comparison to industry averages almost meaningless.

How Long Does It Take to Prepare a Business Valuation?

 For a competent professional, it takes at least 40-60 hours to perform a thorough analysis, make a qualified value determination, and prepare a proper report.  It may take longer if there are certain circumstances involved, such as: