Small business owners should periodically consider a business valuation. A business valuation can provide insight into your company’s financial health and worth. It can also help you to identify potential problems and areas for improvement. A business appraiser can determine the fair value of your business, whether you need it to support a transaction price or for your peace of mind.

What is a business valuation?

A business valuation is the estimated value of a company. The valuation provides an objective, independent number or range that can help you decide on a fair price when looking to buy, sell or invest in a business.

The best way to choose a valuation method is to work with a qualified business appraiser who can select the most appropriate method for your purpose.

Determining the value of a business is not an exact science. However, several methods can generate a fair and accurate valuation. A good business appraiser will use an approach best suited for your needs and make sure you understand what your business is worth.

When should you consider getting a business valuation?

There are many reasons why you might need a business valuation. Whether you’re looking to buy or sell a business, raising capital, or want to get an accurate picture of how much your business is worth. 

Buying a new business

A valuation can help you determine how much to pay for a business you might be interested in buying.

If you’re looking to purchase a new business, you want to make sure that you are paying a fair price in the transaction. An independent business valuation can provide you with a starting point to engage in the purchase negotiations. Then, you can rest assured that you have done your due diligence getting a more in-depth look at the business you’re about to purchase.

Selling your business

If you’re in a position to exit from your existing business, you should consider getting a professional appraisal to value your business.

You’ve probably poured your heart and soul into building this business from the ground up. When it’s time to sell, you want to ensure that you get what the company is worth. An independent valuation can support the sale price of your business and ensure you’re getting a fair price. 

When you sell your business, you are also liable for taxes. Therefore, an independent business valuation is a valuable tool for tax planning. It can help you prepare for tax bills on sale. Your financial advisors may even be able to find opportunities to structure the transaction to minimize your tax bill. 

Raising capital

If you’re looking to expand your business, you’re looking for investors or lenders to contribute to the company.

An independent valuation can help you determine how much equity to give up in exchange for investment funding from equity investors. In addition, it will provide potential investors or lenders with a quantitative basis to support the value of your business.

Setting up employee stock options.

A way to retain key talent is to set up an employee stock option program.

If you are operating a privately-held business, it can be challenging to understand how much your business is worth.

A valuation can help you determine how much to grant employees in stock options. In addition, it can help you set up the program to be beneficial to your employees without having to give up too much equity from your perspective.

Succession, Estate and Tax Planning

If you are planning to give or sell your business, a valuation can help you determine the company’s value for estate planning purposes.

Many of our clients have family-run businesses. Like them, you want to ensure that you have set up the next generation for success. A business valuation can also help you structure your business for succession planning in a way that works for you and your family’s needs.

You may even want to consider a business valuation for tax planning purposes. If you’re looking to sell your business now or in the future, you can work with your accountant or financial advisor to determine the best way to structure your business to avoid surprise tax bills on sale.

Change in Family Situation

Significant changes in your family situation can affect your personal finances, and it might be necessary to understand your business’ worth at this point.

If you’re going through a divorce or maybe dealing with the death of a spouse, you may require a business valuation to ensure that your personal finances are protected.

With the help of a business valuator, you can make sure that your business is priced fairly with an independent perspective for tax or settlement purposes.

Business “Health Check”

If you’ve been working on your business for a long time, an independent observer can provide a unique perspective on the health of your business.

A valuation can help you pinpoint potential problems and areas for improvement in your business. The appraiser can identify your business strengths and any opportunities for growth you may have missed. The takeaways from the valuation can help you strategically approach your business’s future growth.

How to get a business valuation done

Find a qualified professional

The first step is to find a qualified professional who has the expertise in valuing businesses in your industry for the purpose that you need.

Many accounting firms have the in-house expertise to value a business or work with business valuation experts they recommend to their clients. Therefore, it is essential to tell them why you are looking for a business valuation.

Provide business documentation

Once you’ve found an expert you’d like to work with to value your business, you’ll need to provide them with information and documentation that they can use to assess the company.

They’ll likely ask for documents related to:

  • financial statements
  • tax returns
  • capital structure and ownership
  • employment, customer and supplier contracts,
  • leases, and other financial obligations
  • industry situation, market share, competitors

While the above list is not exhaustive, the more information you can provide your appraiser, the more accurate their valuation.

Review the business valuation

The appraiser will then use the information you provide to value your business using one or more valuation methods – based on either:

  • value of your assets – tangible and intangible assets,
  • the income or earnings of your business, or
  • based on comparable market data such as price or earnings multiples.

The valuation method the appraiser chooses to use may depend on the purpose of your valuation, the industry of your business, and several other factors.

You can go through the report and understand their basis for valuation and any assumptions they have used. 

Once you have the report, you can use it for the intended purpose with peace of mind.

Valuing your business

A business valuation is an essential tool that can help you make strategic decisions in your business.

If you’re considering a business transaction, it’s a good idea to get a valuation done to clearly understand the company’s worth and value.

Whether you are looking to buy, sell, or invest in a business or looking to protect your legacy, a business valuation can provide you with an accurate picture of your business’ worth.

Contact McCay Duff LLP in Ottawa for your Business Valuation Needs

Talk to an accredited business valuator to understand the value of your business. At McCay Duff LLP, our team of accounting and finance professionals can help you understand the value of your business for any purpose. To learn more about how the Chartered Professional Accountants at McCay Duff LLP can provide you with the best valuation expertise for a business, please contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.