A business valuation assesses the fair market value of a company – and more. During the valuation process, a Certified Valuation Analyst can help a business owner uncover opportunities to grow revenue, cut costs, bridge gaps in cash flow, and improve operational efficiency.
Whether it is a start-up or a well-established entity, every company should take steps to ensure its financial health and long-term success. Timely and accurate bookkeeping practices and financial reporting are essential to the business. Still, they don’t help an owner fully understand all the intricate details that drive the value of your business. A business valuation goes beyond the property, inventory, and equipment reports to include intangible assets like goodwill, trade secrets, copyrights, proprietary technology, customer lists, and brand recognition.
The data and insights provided are more important now than ever, with the unique operational and economic challenges businesses face today.
Here are five ways a business valuation can benefit your company in 2023:
1. Take advantage of the estate & gift tax exemption
Business owners should take advantage of the Tax Cuts and Jobs Act (“TCJA”), which increased the lifetime gift and estate tax exemption, while it is still available. Per the IRS The current exemption increased to $12.92 million per individual in 2023 but this amount is set to revert to under $5.49 million in 2026. The IRS has stated that making large gifts now will not harm estates after 2025. Obtaining a business valuation can help you understand the value of your assets and any potential tax liabilities that would apply to the transfer. In addition, this process will organize your estate and your beneficiaries will need not worry about the financial implications of the estate’s business transition.
A Certified Valuation Analyst can help evaluate specific ownership interests and determine whether discounts for the lack of control and lack of marketability may be important considerations.
2. Transition a business
The pandemic reinforced the need for succession and contingency plans. It takes time to transfer roles and responsibilities, and employee retention may suffer without proper planning. But a business valuation can help you justify, calculate, structure, and support key employee incentives, such as stock options, current or deferred cash bonuses, or non-qualified deferred compensation.
As more and more business owners reach retirement age, a staggering number do not have an exit plan. Whether you are exiting through a sale, transferring to key employees or family, or buying out a partner, a business valuation gives you an unbiased starting point. You may need to close the gap between your business’s value and your post-retirement financial needs. Even if you don’t, you should leave lead time to increase your business’s value and realize top dollar in a sale or formulate a feasible payment plan if transferring to family.
3. Improve options for financing, funding, or exit
Whether you want to raise debt and equity or prepare for an eventual sale or acquisition, a business valuation can provide you with a snapshot of your business, including its financial health and future earning potential. Start-ups, technology companies, and other businesses of all sizes and in any stage of development need to ensure their business is attractive to potential investors. A business valuation can help you attract private equity groups or venture capitalists.
A business valuation can also help new and established businesses obtain financing. Whether you need help buying new equipment or meeting payroll, a professional business valuation provides a better depiction of your financial health than financial statements alone. In fact, if you are applying for a loan from the U.S. Small Business Administration (SBA), a valuation may be required.
4. Litigation support
Whether you’re facing marital or shareholder divorce, a business valuation provides a credible, fair market value or fair value report to ensure that assets are represented accurately for full financial disclosure. The engagement may uncover hidden assets or personal benefits expensed through the business, if they exist. Personal and professional goodwill will be considered as part of this process as well. This type of fact-finding financial transparency can help keep emotions out of this division. This can be accomplished by hiring an expert jointly or individually.
5. Get a joint evaluation assessment when buying, selling, or merging
According to McKinsey’s M&A Practice Review, the global M&A market declined slightly in the first half of 2022; however, the United States has continued to be one of the most active traders.
A professional business valuation ahead of any M&A activity can help determine the fair market value of a company, assess liquidity, and determine the need and ability to borrow, if necessary. Further, a Certified Valuation Analyst can help both parties understand the value of the business during the negotiations, offer advice on the terms of the deal, and facilitate the transaction.
By working with a business valuation services practice that is part of a full-service CPA firm, you’ll benefit from multidisciplinary expertise. LGA’s Business Valuation, Advisory, Tax & Forensic Accounting Teams can help you uncover the truth behind the numbers and understand what that means for you and your business.
As a Certified Valuation Analyst, I provide business valuation services that support business owners’ financial and growth goals, help them attract investors or obtain capital, and plan for succession, their legacy, and estate. As a Master Analyst in Financial Forensics, I help clients assess marital assets, including those in a family business, and prepare analyses for litigation support. Contact me today to learn more.
by Ross Yogel, MBA, CPA, CVA, MAFF
Ross Yogel is a partner at LGA. He specializes in serving clients and attorneys in need of closely held business valuations, financial forensics, and financial consulting. Ross is a licensed Certified Valuation Analyst (CVA), Master Analyst in Financial Forensics (MAFF), and CPA and has been working in business valuation for over 10 years. The industries Ross has served include restaurants, real estate, healthcare, insurance, sales, automobile dealerships, manufacturing, architecture, and construction. Some services he has provided to clients and attorneys include: estate and gift planning valuation, litigation support valuation, start-up/venture consulting, data analytics, quality of earnings due diligence, and fraud and forensic investigations.