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Business Valuations & Exit Planning: A Business Owner’s Guide

This is part three of a four-part series on business valuations, written for business owners who need to understand how business valuations are used in the process of preparing for your business exit. As this series deals with tax and legal subject matters, readers are advised to consult their tax and legal advisors. This material is for educational use only.

Business Valuation Methods

Determining the value of a privately held company is a combination of science and art. Professional appraisers have a toolbox full of valuation methods available to them to calculate the value a company (or in some cases a partial interest in that company.) Applying these methods and doing the math correctly is science. But selecting which method or methods to use is art, because that is determined by the appraiser based on his or her judgement. For you, it is important to know some of the more common methods so you can intelligently discuss them with your valuation professional, because which valuation methods the appraiser uses can produce a dramatically different result. For example, one method might produce a $50 million valuation for a company, while another method might produce a $25 million valuation for the same company—the differences are often that dramatic. So which valuation method, or methods, your professional applies to your company is a critical issue that many business owners overlook or don’t know enough to ask.

Business Valuations & Exit Planning: A Business Owner’s Guide

This is part two of a four-part series on business valuations, written for business owners who need to understand how business valuations are used in the process of preparing for your business exit. As this series deals with tax and legal subject matters, readers are advised to consult their tax and legal advisors. This material is for educational use only.

How to Value a Business

To understand business valuations and how they work, it is helpful to understand the general process most valuation professionals (appraisers) use. The process is more involved and collaborative than many business owners expect. To perform a valuation, appraisers usually do not simply gather financial reports, input numbers into a spreadsheet, and then spit out a figure. You the owner, your company management (especially your CFO and/or controller), and your advisors will work closely with the valuation professional at key steps. The general approach consists of:

Business Valuations & Exit Planning: A Business Owner’s Guide

This is part one of a four-part series on business valuations, written for business owners who need to understand how business valuations are used in the process of preparing for your business exit. As this series deals with tax and legal subject matters, readers are advised to consult their tax and legal advisors. This material is for educational use only.

Why and When Do You Need a Business Valuation?

Business valuations are like police officers—you can go for an extended period without ever needing one, but when you do it sure pays to have a good one on hand. So, why and when does a business owner need to engage a valuation professional to do a formal appraisal of the company? (Note: In some cases, the valuation may also need to appraise specific assets owned by or used by the company, such as real estate, equipment, and intellectual property.) This article summarizes the circumstances why and when a business valuation may be essential and/or prudent. The article then describes the situations when a business valuation may be unnecessary, or even counterproductive and a waste of money.

Figuring out what you want to do after you exit from your company is a crucial step to exiting successfully and happily.

Many business owners have heard stories or know another owner first-hand who exited only to realize he or she was bored, frustrated, and regretted the decision to leave behind the daily challenges and sense of purpose that comes with owning and leading a company.

It will not matter how much money you have in the bank after you exit if you wake up every day lacking something meaningful and relevant to do with your time and talent.

Yet too many owners do not know what they are going to do after exit. Or, just as dangerously, some owners assume they know but have not tested their assumption by trying the activity in real life for any meaningful period of time.

One of the most common questions business owners ask us as we help them prepare for exit is, “Do I need to get audited financial statements?” It’s an important question because the wrong answer can lead to wasted money, greater risk of your exit falling through, or both.