It’s a good question with no easy answer. Court opinions use the concept of a voluntary exchange to determine value. Your business is worth what someone is willing to pay for it. As a business owner trying to plan for your future, that’s not enough. Often, the bulk of a business owner’s net worth is tied up in the business – their business in many cases is their most valuable asset. Knowing the value of that asset with the help of a team of professionals, is critical to proper business planning and to achieving personal financial goals.
The Importance of Business Valuation
A business valuation is a critical first step to any type of business planning whether it is for a buy/sell agreement, positioning the business for a loan, taking on investors, preparing for a sale, transitioning the business to the next generation or key employees, or estate planning. Understanding the value of the business is the starting point for any exit/succession strategy for business owners and is a critical starting point for considering retirement.
Key Considerations & Methods
The first step is to understand the purpose of the valuation. If the valuation is being used for a lifetime gift, charitable contribution or business sale for example, a formal valuation that meets certain IRS requirements will be necessary. Formal valuations can be time consuming and costly. For many cases, an informal valuation may be a better fit. In particular, when a business owner is looking to develop personal financial planning projections or create a shareholder buyout agreement or determine key person life insurance needs, an informal valuation is sufficient.
Next, the key performance indicators are defined based on the analysis of company specific data as compared to industry specific averages. From these we can learn whether the business is outperforming, underperforming or meeting industry standards. Then we need to determine which method best fits that purpose. The three most common methods of business valuation are (1) The comparable sales approach (2) The book value approach, and (3) the income approach.
How it Works
Start with the end in mind. This is not as easy as it sounds. It is an evolutionary process. At Diamond State Financial Group we have been helping business owners work towards their goals since 1989. Our skill along with our complimentary, no obligation, informal valuation tools help business owners implement and execute their plan on their terms. To get a complimentary, no obligation, informal business valuation for your business and to find out how we can help you align your business and personal goals, contact Neil Stalter, CFP®, ChFC®, CBEC® at 302-366-0366 or neil.stalter@dsfg.com.
Diamond State Financial Group does not provide business valuation. Business valuations are accessed through a third party relationship.
Financial Professionals do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation
Neil is a Registered Representative and Investment Advisor Representative of Securian Financial Services Inc. Securities and Investment Advisory services offered through Securian Financial Services Inc. member FINRA/SIPC Diamond State Financial Group is independently owned and operated. 121 Continental Drive, Suite 110, Newark, DE 19713
TN 3653015 DOFU 7/2021
