Six Reasons to Perform a Business Valuation

December 6, 2021

If you own a closely held business, have you given thought to how much your business is worth? Surprisingly, many owners haven’t. Even among those who have, many haven’t performed a formal business valuation.

Below are six compelling reasons to have a business valuation performed as soon as possible.

1. It’s smart to capture a photogenic moment

Like a snapshot, a valuation is a measure of a business’s worth at a particular time. With the pandemic receding, the economy is on the mend and hopefully the outlook for your business has followed suit. Healthy profitability and solid cash flow lead to higher values for privately held businesses. Have your business valued now, while the economic outlook is positive, and you’ll be happy with the way it positions you to future buyers.

2. Mergers and acquisition activity is heating up

After a temporary COVID-related slowdown in 2020, M&A activity has heated up this year due to significant pent-up demand. While big-ticket deals get the most publicity, there are actually more sales of middle market businesses (those with $5 million to $500 million in revenue) in the U.S. than of large businesses.

Middle market businesses can be attractive to other middle market businesses looking to grow, as well as large businesses looking to gain additional market share. As a potential seller, you could have multiple buyers pushing up the value of your business. A business valuation helps prepare you for an offer from an interested buyer. It puts power in your hands to evaluate whether or not their initial bid is serious.

3. Interest rates are still low

As the U.S. economy has recovered, the Federal Reserve has decided to keep interest rates at historically low levels. Low interest rates facilitate financing of deals for privately-owned businesses such as yours and are a contributing factor to the increase in M&A activity noted above. Since most buyers will likely finance at least a portion of a purchase, these rates help move them to the table.

Low interest rates offer you another advantage: when used in financing a potential deal, they will generally lead to a higher multiple for the value of your business. Nobody expects these interest rates to last forever, so it’s a good idea to act now while rates are low.

4. The aging population portends a future shift in the market

Demographic trends reveal that the U.S. population is aging. There are about 46 million adults in the U.S. age 65 and over today, but this is expected to double to almost 90 million by 2050. By 2030, one in five Americans will be at least 65 years old.

This aging population base will include many business owners with the desire to transition ownership in their privately held business. That’s going to put more and more potential sellers in the market, shifting power to the buyers. Having your valuation completed now means you’ll be prepared to act quickly when you sense an impending change in market conditions that prompts you to seek a buyer.

5. A valuation is your key to a healthy succession plan

You may be one of the many business owners who have delayed discussing what will happen to the business when you are gone. Succession planning is a gift you offer your loved ones and your workforce. But it’s a difficult conversation to initiate, even though you understand its importance.

A business valuation can offer you an avenue to broach the subject. Find out what your business is worth and then gather the right people around the table to plan for the future of this asset. With hard numbers to discuss, the meeting can be productive, rather than theoretical.

6. The number you have in mind is probably wrong

We all take stabs at assigning values to just about everything in life, whether we are conscious of it or not. You may have done your own market multiples analysis of your business, based on industry rules of thumb or other modeling methods. Or you may be hazarding an educated guess.

Your attempts at an unbiased estimate might lead you to business sales multiples based on transactions that are not exactly comparable to your business or are too old to be valid. Using those old industry multiples from a book on your shelf just might structure a sale to a very happy buyer. You wouldn’t want to leave money on the table, so make sure you have the right value.

A professional business valuation is undertaken by specialists who are credentialed by organizations such as the American Institute of Certified Public Accountants (AICPA) and the National Association of Certified Valuators and Analysts (NACVA). These specialists have received valuation designations such as Accredited in Business Valuation (ABV) and Certified Valuation Analyst (CVA). They will evaluate all comparable transactions to find the multiple for business transactions similar to businesses like yours in the current market.

Selling your business may not be your goal today, but that doesn’t mean you should put off your business valuation. Knowing your business’ value tells you where you stand and gives you options. And it just may give you the upper hand in any business transaction the future holds.

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