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Top 8 Situations Where Business Valuation is Needed

By August 22, 2022Blog4 min read
Top 8 Situations Where Business Valuation is Needed

Business valuation refers to the process of determining the worth of a business. Valuation advisory firms draw up business valuations based on several key factors, including management of the business, the potential future earnings, the market value of the assets and its capital structure composition, etc.

Valuation is a critical step that forms the basis of transactions such as buy/sell, mergers and acquisitions, investment analysis, financial reporting, etc. Business valuation may also be needed for purposes such as capital gains tax or inheritance tax computations.

Let’s dive into some of the most common instances where getting a business valuation done would be beneficial.

  • Exit Strategy Planning

Knowing your business valuation is also important if you plan to sell your business altogether. Once you know the business valuation, you can plan strategies to increase its profitability. This will improve the company’s value.

  • Acquisitions and Mergers

One of the reasons you need a well-prepared business valuation is to be ready for mergers and acquisitions. Without knowing the value of your business, you cannot know what a fair asking price is. Knowing the right value allows you to buy or sell without losses.

  • Buy/Sell Agreements

Signing buy/sell agreements between principals in a partnership requires a clear idea of what the value of the business is. This value has to be mutually agreed upon to come to an agreement

  • Buy-Out/ Business Dissolution

A business that has multiple partners or shareholders often comes to an end when one or more partners wishes to dissolve the partnership and thus the company. This requires the business to be judicially dissolved. It is important to determine the business valuation to make a fair transaction between the partners.

  • Succession and Estate Planning

When it comes to passing down businesses to one’s successors or gifting away shares of the business, it is important first to know the full worth of the business. This requires the intervention of a valuation advisory firm to determine the value of the business.

  • Marital Dissolution

Businesses that are shared by married couples also undergo equitable distribution if they are divorced. This means the assets and liabilities are shared equally between parties. Taking into account the different contributions each spouse has made to the business at various stages of the business are taken into account. A business valuation is made, and it is then distributed between them.

  • Funding and Investments

A new business that needs funding or investors needs to know firsthand what the business valuation is. A new business’s valuation may be depended on the vision and its overall value in the market segment they are offering. Mature businesses also need business valuation for funding and investments.

  • To Determine the ESOP

ESOP or Employee Stock Ownership Plan is an employee benefit plan. Companies that use this system encourage employees to acquire stocks or ownership in the company. To carry this out, the company must first know its full worth, which means it needs a business valuation.

Recommended, A Quick Guide to the Top Property Valuation Methods You Should Know

Looking for a Good Business Valuation Firm?

Now that you know where business valuation can be most useful, you must also understand that for a valuation to be really useful, it must be done by an experienced business valuation firm with the appropriate credentials.

As a valuation advisory firm with more than three decades of solid reputation, RNC is the business valuation partner you can trust. Contact us today to learn more about our business valuation services or to book an appointment with us.