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10 Reasons to Perform a Business Valuation

Many owners of closely held businesses haven’t given much thought to how much their company is worth. This is especially true for owners who aren’t planning on selling their businesses anytime soon.

 Even if a sale isn’t in your immediate future, however, you could still benefit from a business valuation. Here are 10 reasons to perform a professional business valuation.

  1. You’ll capture a snapshot of your company’s value. A business valuation is a snapshot of your company’s value based on current conditions. With the economy rebounding from the pandemic lockdowns, business and economic conditions have improved drastically from a year ago across many different industries. This could portend well for your company’s current value. 
  2. The M&A market is heating up again. Merger and acquisition activity slowed down last year due to the pandemic, but things are starting to heat up again as pent-up demand rises to the surface. Global M&A volume hit a record $2.4 trillion in May, up a whopping 158% from May 2020, due mainly to the recovering economy, surging stock market and low interest rates. 
  3. Interest rates remain low. The Federal Reserve has stated its intention to keep interest rates at historically low levels for the foreseeable future. Low rates help facilitate the sale of privately held companies by making it easier for business buyers to get affordable financing. This may lead to higher multiples for your business and a higher sale price. 
  4. Demographic trends are shifting. The U.S. population is aging as there are now about 46 million Americans who are 65 years of age or over. One out of every five Americans will be 65 or over by 2030, according to projections. Many of these older Americans are business owners looking to retire, which means there is likely to be more competition among buyers, potentially shifting the negotiating leverage to sellers. Getting your business valued now could put you in a prime position to sell when you feel that the timing is right.
  1. A valuation will be crucial to your estate and succession plan. Your business is probably the most valuable asset you own, which should make it a central part of your estate and succession planning. There may be major tax consequences involved in selling a private business that can be minimized through careful estate planning — a business valuation is often part of this process.
  2. As part of a buy-sell agreement. Partners in closely held businesses often enter into buy-sell agreements to ensure the continuation of the business should one partner decide to retire or become disabled or die. A business valuation usually must be performed before a buy-sell agreement can be completed. 
  3. To make it easier to borrow money. Lenders sometimes want to see a business valuation before signing off on business loans, depending on the size and type of loan and the borrower’s industry. In certain situations, a valuation can help the lender get a better handle on your business’ creditworthiness and possibly tilt the scales in your favor when it comes to loan approval. 
  4. To obtain business insurance. A business valuation may be required in order to purchase certain types of business insurance, such as key-person insurance. This policy will pay out benefits in case you can no longer handle the day-to-day responsibilities of running the company due to sickness, disability or death. 
  5. To set up an employee stock ownership plan (ESOP). An ESOP is a popular succession planning tool through which shares in a closely held business are transferred over time to the company’s employees. Per IRS and Department of Labor regulations, a business valuation must be performed annually with an ESOP to set the price per share for the plan participants. 
  6. Your guess about business value is just that — a guess. Like many owners, you probably have a “ballpark” or “gut feeling” about what your business is worth. But there’s a good chance that your guess is off base — maybe way off base.

 

Owners tend to see their businesses through rose-colored glasses, over-emphasizing in their minds the positives and discounting the negatives. A business valuation will give you an unbiased value based on objective data compiled and analyzed by a trained valuation professional.

 

Please contact us if you’d like to talk about business valuations in more detail and whether it makes sense to have one performed for your business.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.