What is an independent business valuation and why does it matter at every stage of a business?
Whether your business is a start-up, established and in growth mode, or has reached its prime, understanding its enterprise value is essential. An independent business valuation serves two roles: a starting point for long-term strategic planning, and an objective reality check for owners with unchallenged expectations about what their business is worth.
How is an independent valuation conducted?
A business valuation is conducted by a professional third party who inspects and analyzes the market, industry and entire business — including assets, depreciation and other internal and external factors — then applies certain methodologies, depending on the industry and circumstances, to arrive at a reasonable opinion of value. Ideally, your independent advisors apply more than one valuation methodology, so all stakeholders get a clearer picture of how the business is valued over time.
Why would you need to know what your business is worth?
- Attracting equity investment — a successful start-up or established business often draws interest from private equity funds, family offices, high-net-worth individuals, angel investors and venture funds; a recent valuation offers a complete snapshot of financial health, structure and future earning potential
- Selling a business — gives a clear, objective assessment of market value based on current condition; sets a realistic asking price, builds confidence in negotiations, and may be used by lenders for financing
- Transition planning — provides a baseline of your assets and current condition, reveals gaps between what you have and what you need, and helps you choose the best option and build a plan
- Strategic planning — uncovers opportunities to grow revenue (new products or markets) and identifies areas to reduce costs and operate more efficiently
- Growth financing — a professional valuation with detailed financials streamlines lending for equipment, remodeling or payroll
- Value protection — helps determine appropriate insurance coverage and can influence payouts under co-owner life insurance agreements and for natural disasters
- Divorce — supports an informed, unbiased division of marital assets that include a business
- Buying out a partner — determines the buy-out value of a divesting owner's interest for the remaining partners or shareholders
- Management buyout — values the buy-out when older-generation ownership divests to the management team
- Estate planning — a recent valuation with up-to-date records helps your chosen successor (family member, partner or key employee) get your estate in order
Why treat valuation like ongoing business health monitoring?
Just as you stay vigilant and proactive about personal health risks and opportunities, you need to be proactive about protecting and growing your business. Understanding the risks to your business and the drivers of valuation guides your strategic planning. An independent third-party assessment at regular intervals protects and grows the enterprise value of your business.
Key facts: independent business valuation
What it is: a professional third-party analysis of market, industry and the full business, applying multiple methodologies to reach a reasonable opinion of value
Best practice: apply more than one valuation methodology for a clearer picture over time
Ten common reasons: attracting equity, selling, transition planning, strategic planning, growth financing, value protection, divorce, partner buyout, management buyout, estate planning
Strategic use: a starting point for long-term planning and an objective reality check on owner expectations
Cadence: obtain an independent assessment at regular intervals to protect and grow enterprise value
About The Shaughnessy Group
Founded in 2017 to help business owners successfully transition out of their most valued asset — their privately held, lower-middle-market company — and to help them grow through acquisition and source debt to fund acquisitions. shaughnessy.group.
Disclaimer: This article is for general informational purposes only and does not constitute valuation, legal, tax or financial advice. Consult a qualified business valuator and your advisors regarding your specific circumstances.
