If you own a business, chances are it’s by far your most valuable asset. So, what’s it worth? It can be difficult to objectively measure this when you are as close to it as you undoubtedly are. To this end, there is no substitute for a proper valuation.
“A valuation provides a clear picture of the true market value of your business,” says Nuri Benturk, Senior Vice President of Investment Banking Solutions at RBC Wealth Management–U.S.
This information is necessary for business owners to plan for the future of their company, whether they want to build a succession plan, decide whether to sell, pass the business down to a future generation, transfer ownership to employees via an employee stock ownership plan, or simply determine a growth strategy. Yet, a 2024 survey shows that nearly half of all business owners have never completed such a valuation process.
A common refrain among business owners is that the valuation process is too expensive, time-consuming, and complex. But getting a valuation may be easier than you think. Here’s what to expect.
What Is a Business Valuation?
Your accounting statements present a stripped-down value of your business—the book value if you sold every asset, paid off your debts, and cashed out. However, this is rarely the full picture, and there are other determinants of a company’s value to a potential buyer that aren’t found on the balance sheet.
“For example, imagine a large competitor is eager to expand in your
geographic area,” Benturk says. “They could be willing to pay a premium that’s not being captured in your book value.”
A valuation considers both tangible and intangible aspects of a business, such as assets, liabilities, profitability, market position, and future growth potential, to determine its overall worth.
“Sometimes owners lose sight of what their business is actually worth, so a valuation can be an important reality check,” Benturk says.
When a professional assesses your business’s value, they calculate a figure using different market-based, income-based, and asset-based approaches. The appraiser will choose the best method for your specific situation, considering factors such as the purpose of the valuation, your company size, location, and industry.
The Benefits of a Business Valuation
Knowledge is power, and knowing how much your business is worth allows you to make informed decisions in several situations, including:
Preparing to Sell
According to the survey, nearly 30 percent of surveyed business owners currently plan to sell or transition their businesses, and 70 percent will do so in the next five years. When considering their exit, valuation was a top concern for the surveyed owners. That’s because it’s a crucial step in creating a more effective business transition plan.
Not only does a valuation give you an idea of what to expect from a sale, but it also helps you identify opportunities to optimize your business that could have a significant impact on the sale price—for example, by reducing costs and improving your margins over the coming years.
It’s important to have your valuation completed before you begin looking for buyers or discuss transitioning the business with family or business partners. That way, you’ll have time to implement changes that may affect your business value, and you’ll be in a better position to negotiate if someone unexpectedly approaches you with an offer.
Making Future Investments
If you’re thinking about investing even more to grow your business, a valuation can show the return on the money you’ve already spent. “Before contributing another large round of savings or financing, wouldn’t it be nice to know how things worked out in the past?” Benturk asks.
The valuation and proof of past results can support your case to investors and demonstrate how to spend additional capital in ways that may generate the most value.
How to Get a Business Valuation
Some wealth management firms offer informal valuations to their clients for free. In this instance, you’ll need to provide your financial statements and business tax returns.
But if you are looking for a formal valuation that can form the basis of a buy-sell agreement or help you prepare for a future sale, it may cost around $30,000 to $50,000, estimates Benturk. These valuations are in-depth, and the firm may partner with an investment bank with experience in your industry to research your valuation. This process takes several weeks, and selling a business can take several months, which is why it’s wise for business owners to get a head start.
It is critical to remember that even a formal valuation is still just an estimate. What you ultimately get in return for your business depends on what someone is willing to pay. Whether you’re getting ready to sell or simply want to enhance your business’s strategic planning, working with your financial advisor to understand your valuation is key to navigating the future with confidence.
