If you own a business, either wholly or in partnership, it is safe to assume that at some point in time you will need to obtain a business valuation. 

Whether you plan to sell your Austin company, seek funding from lenders or investors, or expand its offerings through a strategic merger or acquisition, understanding the true value of the business entity is an important step in the process. 

This article will help you understand the basics of the business valuation process and how it works, as well as when you might need business valuation services and why planning ahead is an absolute must.

What is a business valuation?

A business valuation is an estimation, based on available financial and related data, of the total economic value of a business. In other words, it is a calculation of the dollar amount you could expect to receive if you sold your business today. 

Business valuation services are performed by a qualified and credentialed valuation expert in compliance with the standards set forth by the American Institute of Certified Public Accountants (AICPA). These guidelines represent industry best practices and ensure quality, consistency, and transparency among professionals who offer business valuation services.

When working to determine the value of a company, valuation experts will take into account the current and projected earnings of the company, its assets and liabilities, and the market value of its outstanding shares of stock (i.e., market capitalization), as well as any other relevant information. 

Why is getting a business valuation important?

There are a number of reasons why someone may seek out business valuation services. Some of the most common reasons to request a business valuation include:

  • Planning for a sale, merger, or acquisition
  • Obtaining financing from a lender
  • Business partner separation or retirement
  • Setting up an employee stock ownership plan (ESOP)
  • Creating a succession plan for future leadership 
  • Marriage dissolution (distribution of assets)
  • Litigation consulting and dispute resolutions
  • Tax and financial planning
  • Estate tax and gift tax planning
  • Filing insurance claims
  • Executive compensation
  • Shareholder/corporate planning
  • Financial reporting

Additionally, business owners—particularly in fast-growing industries—may request periodic business valuation services simply to stay on top of the current market value of their company in order to develop a successful growth strategy and maximize their earning potential over time. 

When should you think about business valuation services?

This is an important question—and the answer is well before you actually need them. 

Business valuation is a complex and extensive process. It typically takes about six to 12 weeks to complete a credible valuation, depending on the size of the company and the length of time needed to compile and analyze all of the necessary information. 

For companies with impeccable financial records and proper accounting controls in place, the process is relatively streamlined. However, if your financial documents are disorganized or missing key information, it will likely take longer to complete your business valuation. For this reason, it is imperative to plan ahead and always keep accurate and well-organized accounting records. 

Business owners should also have a very good understanding of their market, their competitors, their customers, and the strength of their vendors. All of these things can impact the overall profitability and stability of the company and ultimately affect the business valuation outcome. For example, if your products or processes have not kept pace with technological advancements in recent years, it could significantly lower the value of your business. 

Is it possible to rush a business valuation? 

As mentioned above, business valuation experts must comply with specific AICPA standards to complete a credible valuation—and the process takes time. However, in some cases, such as when a purchase offer is already on the table, a business owner may need to know fairly quickly what the company is worth. 

While time constraints may not allow for a full valuation, valuation experts can still provide assistance and help to ensure that nothing is overlooked when thinking about overall business worth. Reasonableness testing, for example, can be used to ensure the available accounting data is accurate and there are no issues or inconsistencies.

Bottom line: Clean financials and careful preparation pay off.

Having a clear understanding of the monetary worth of your company can prove beneficial in myriad situations. Whether you are developing a strategic growth plan to stay competitive or looking to sell your business and begin a new chapter, business valuation services are a critical piece of the puzzle—and the more organized and meticulously documented your financial reporting is from the start, the simpler the process will be. 

Begin today by building a solid financial framework and implementing strong accounting controls so that when you do need business valuation services, everything is in order. To ensure you are prepared well ahead of time, Mangold Anker Phillips, now Aprio, offers management advisory services to help you implement key accounting processes and optimize efficiency. We can even help you choose the right accounting software to meet the unique needs of your business and your industry. 

Call (512) 327-0909 for a free 30-minute consultation or email us at info@map-cpas.com to learn more about how we can help you safeguard the financial future of your business.