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In my more than 10 years of business valuation experience, I have met hundreds of owners who are ready to sell for a multitude of reasons: Retirement, inability to service debt, divorce, etc.
Many have built their businesses from the ground up and are emotionally attached to them. Often, owners see themselves selling their business for an amount that would provide them with a comfortable retirement.
Yet, considering the subjectivity that is taken into account when a business owner envisions the value of his or her business, it is not surprising that businesses rarely sell for an amount of money that would allow the owner to have a hefty nest egg for retirement.
What is a certified business valuation?
Certified business valuations are reports created by valuation experts who have received and maintain certification status through an accredited valuation association such as the National Association of Certified Valuation Analysts. The valuations adhere to specific certification guidelines to ensure the inclusion of all pertinent information with regards to the company’s value.
The golden standard that valuators must adhere to when valuing a business is Revenue Ruling 59-60. The primary purpose of this ruling is to provide a basis for the business’s fair market value. The result is a valuation with the in the highest level objectivity and accuracy.
Why are business valuations necessary?
Revenue Rule 59-60 states that the valuator must evaluate the fair market value of the business, which is “the price at which the property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both having knowledge of relevant facts.”
This rule ensures that the valuation is objective to the fullest extent possible. Some subjective measures are applied, but the measures applied are determined through the expertise of the valuator.
In obtaining a business valuation, an owner will be able to know the value of his or her business and not be disillusioned by the amount determined via emotions and unrealistic expectations. The owner can then decide whether or not the decision to sell, obtain additional funds for business development, retire, etc. is the right decision to make at the specific point in time.
How is value determined?
There are many steps in the business valuation process. These steps are in line with Revenue Ruling 59-60 and must be taken into account in a valuation report.
The following list helps describe the high-level description of each step of the process.
Below are some of the most relevant factors utilized in a business valuation.
These necessary steps and factors considered are how an expert arrives at an objective value of a business.
Qualified to evaluate
To get a true value of a business, a certified business valuation expert should be engaged.
As mentioned previously, business owners frequently feel as though they can value their business themselves and, by doing so, often undersell or hold out for the unlikely buyer who is willing to pay a hefty price.
Business valuation experts are individuals who frequently have an extensive background in the financial sector and, as previously noted, are certified through a valuation association, such as the National Association of Certified Valuators and Analysts (NACVA).
By engaging a business valuation expert, you will be able to obtain the fair market value your company.
Trisch Garthoeffner, CVA®, RIA, is the president of Anchor Business Valuations LLC (Anchor). She has more than 10 years of experience valuing privately held businesses ranging in sales size from $2 million to $50 million. Anchor values businesses in a variety of sectors for a variety of reasons including divorce, preparing for a sale or acquisition, gifting, share valuation for employee incentive programs and financial reporting. For a free consultation regarding the value of your business, please contact her at (312) 632-9144.