Five Reasons to Seriously Consider a Business Valuation

Ask business owners when they should obtain a business valuation and many will probably offer a one-word reply: “Retirement!” But there are many other reasons to engage the services of a professional appraiser, such as a forensic accounting firm, besides the arrival of your golden years.

Here are five to consider:

1. You’re selling your business (or buying another one).

If you’re a seller, a valuation will not only estimate how much your company is worth, but also offer insights into how you can improve it. If you’re a buyer, your appraiser can scrutinize any assumptions the seller’s appraiser uses to justify the sale price.

Business appraisers typically use one or more methods to value a company that’s up for sale. These may include an asset- or market-based approach, a discounted cash flow method, or a capitalization of cash flows method. Consult your forensic investigators to take a better look.

2. You’re creating or updating your buy-sell agreement.

Even if a business sale or purchase is the furthest thing from your mind, you still need a buy-sell agreement. Sudden death or disability, withdrawal from employment or a divorce can all throw a business into chaos if such an agreement isn’t in place.

A professional appraiser or forensic accountant can help establish a clearly named and defined standard of value for your buy-sell agreement and determine (and regularly update) a formula for calculating that value. Doing so can prevent any number of conflicts down the road.

3. You’re getting divorced.

The end of a marriage can be a particularly chaotic and emotional time, increasing the risk that business issues go ignored or mishandled. For this reason, obtaining a valuation from your forensic accounting firm during a divorce can serve as a critical protective measure.

Forensic appraisers generally apply so-called going concern valuation methods to functioning businesses that are expected to continue operations following a divorce. They typically use three variations of these methods: 1) A comparable transactions approach, which compares sales of similar businesses, 2) a present value of future cash flows approach, which measures the company’s expected performance, and 3) a net asset value approach, which looks only at assets and liabilities.

4. You’re creating or updating your estate plan.

A company’s value affects the tax-related costs of selling, gifting or bequeathing its business interests. Failing to estimate value properly may leave your heirs on the hook for a sizable estate tax bill that could force them to sell your company after your death.

Arriving at an acceptable value estimate is no easy task. According to IRS Revenue Ruling 59-60, eight factors must be considered when valuing shares in private companies for estate tax (and gift tax) purposes. Engaging a forensic accounting and consulting professional is a must.

5. You’re growing your business.

You’re probably familiar with the old cliché, “You can’t know where you’re going unless you know where you’ve been.” Well, a business appraisal done by a forensic specialty accountant can tell you exactly where your company has been — and where it is — in terms of business performance and value.

Say you want to add a new product line to boost profits but know you’ll need to obtain some outside financing to cover the expenses. You can use a forensic valuation specialist as objective leverage when seeking investors’ or lenders’ financial help.

Granted, obtaining a valuation can be a complex and time-consuming task. But the benefits far outweigh the hassles.

Contact our forensic accounting services by email or call us at 1 (888) 875-9770 to look at some ways you can tighten your internal controls to prevent fraud.

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