Entrepreneurs work hard to make their businesses successful, but they often have only a vague idea of how much their commercial ventures are worth. Knowing a business’s value may not be necessary for day-to-day operations, but there are situations where an accurate appraisal figure will be needed. Here are four situations when an entrepreneur may have to obtain a business valuation.
1- During a Divorce
Property division negotiations can become contentious during a divorce, especially if the couple lives in a state with community property laws. A family-owned business is often the most valuable marital asset, so determining how much it is worth is often one of the first matters addressed when these talks begin. Divorcing spouses often obtain separate business valuations, and things can get heated if the two numbers are far apart. In this situation, a professional and independent business appraisal company may be called in to resolve the matter.
2- Estate or Succession Planning
Entrepreneurs do not live forever, and failing to address inheritance or succession matters can lead to bitter disputes when a business owner retires or passes away. Entrepreneurs usually try to divide their estates equally, so an accurate business valuation is necessary if one heir will receive the company and other heirs will receive assets like real estate and investment portfolios. An accurate business valuation is also necessary to file an estate tax return. When a business value is included in an estate or succession plan, it is a good idea to have the company reappraised from time to time to ensure the figure accurately reflects current market conditions.
3- Before a Sale or Merger
An accurate value is necessary when a business merges with another company or changes hands. Banks usually provide the capital in these transactions, and they are unlikely to release funds without a reliable business valuation provided by a reputable company. An accurate business valuation is also necessary to ensure the deal is fair and to avoid future litigation filed by parties who believe they were misled. Having your business appraised will give you an idea on if you are receiving a fair offer on your business during a sale or merger.
4- To Apply for Credit
Banks and other financial institutions will usually ask for an accurate business valuation before approving commercial loans or lines of credit, and Small Business Administration loans almost always require an appraisal supported by financial statements. Lenders may not be willing to accept figures provided by a company hired by a business owner, so they may arrange their own business valuations. An accurate valuation is needed when applying for business credit because lenders usually base their decisions on loan-to-value ratios.
Accuracy is Crucial
Business valuations are used when entrepreneurs divorce, sell their businesses, or apply for commercial loans and lines of credit, and accuracy is crucial. If factors like debt levels, industry trends, and the value of intellectual property are not considered when a business is appraised, important decisions will be based on incomplete or inaccurate information. That’s why it’s always a good idea to have businesses valued by experienced professionals.