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January 13, 2025

Contributors: Sladjana Vojcanin

This information is derived from ��ݮ��Ƶ’s Private Client Advisory (PCA) experience, a uniquely tax-aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs. 

Have you ever had a professional valuation of your current business or a prior one? Do you know another business owner who has?����

If you answered yes to either question, I can probably guess why you or they requested one. In the last 25-plus years, I’ve performed hundreds of business valuations for both private companies and public sector organizations. Most business owners request a valuation for one of the following reasons:

• They’re considering merging with or acquiring another company — or getting ready to sell or pass down their business to a third party or the next generation.��
• They want to change their ownership structure to bring in a new partner, buy out an existing partner, or create an employee stock ownership plan (ESOP).
• They or a co-owner are facing a divorce or other legal issue.��

In each case, the business owner is making the right call. Getting an objective, third-party business valuation from a highly experienced valuation specialist enables a business owner (and, when the situation calls for it, other stakeholders) to get a clear, realistic picture of their company’s current market value, and — importantly — its potential.������

Which is why I want to share the following trade secret with you. It’s one I wish I could tell every business owner the day they open their doors: A valuation of your business isn’t only valuable when a triggering incident, like an impending merger or ownership change, prompts one. A business valuation is exceptionally valuable at any time in your business’s lifecycle.

And — here’s what few owners realize�� — if you do a business valuation early, and continue to do them regularly, they can be an absolute game-changer, not only in the trajectory of your business but also in the pace, ease, and effectiveness of your succession planning process and strategies.��

Before we get into the why’s of early and regular business valuations, let’s clear up what a business valuation is — and isn’t.��

Valuation in Business: Definition, Myths, & Misnomers

A business valuation, also known as a company valuation, is a process of assessing the current market value, or overall worth, of a business or company.

Contrary to popular assumption, “assessed current value” does not equate to selling price; it can, however, help you set a starting point for negotiations with buyers.��

Also in the popular assumption category: the myth that anybody can DIY the valuation of a company simply by multiplying its annual EBITDA (aka earnings before interest, taxes depreciation, and amortization) by a specific multiple, usually a multiple of three.����

But sometimes a multiple of two.

Or — depending on the size of your company, its industry, profit margins, and future performance potential — maybe a multiple of four. Or five. Or six.

(You can see where I’m going with this. Simple isn’t so simple. And, as you’ll learn in the “How is a Company Valuation Calculated” section below, it’s definitely not a prescribed method for a valuation that could stand up in court.)��

Finally, there’s the common misperception that an appraisal is the same as a business valuation. Although some financial professionals and websites use the terms interchangeably, they are two different services, with distinct processes and results. I want to make sure you know the difference before anyone tries to sell you either.

What’s the Difference Between a Valuation and an Appraisal?

Appraisals are useful when you need a loan or want to sell a specific asset, or for insurance or tax assessment purposes.

A valuation also results in an estimate, one that can be for regulatory requirements, legal purposes, and major financial transitions (like those triggering events mentioned at the top of this article).����

But whereas an appraisal focuses on assessing the market value of specific assets within the business — think: real estate, equipment, inventory, etc. — a business valuation is much larger in scope. It aims to determine the overall (of which appraisals are one part).��

How is a Company Valuation Calculated?

Getting to a determination of company’s value is no small feat. A thorough business valuation considers and analyzes a litany of factors and complex interplays, the most important of which I’ll share below.����

Please note: I don’t share the below list to astonish you with the level of effort and detail that goes into a proper valuation. I share it so you know what, at minimum, you should expect from a valuation — whether you’ll use it to guide your business’s growth, direct your business transition and succession planning, or need a reliable, supportable opinion of value strong enough to hold up in court. On with the list.��

1. Financial Performance
Remember our previous article, Unlocking Your Business’s Potential: The Power of Cash Flow Statements, where author Tom Shemanski explained the many benefits you gain from generating accurate, timely, and consistent financial statements each month?

Here’s one more: Having a history of reliable balance sheets, income statements, and cash flow statements when you begin the valuation process will enable you to get a realistic valuation in the end. That’s because those statements show key components of your company’s financial performance over time — its revenue growth, profitability, cash flow stability, return on assets (ROA), return on equity (ROE), earnings consistency, and a multitude of other data critical to determining its value.����

(A not-to-be underestimated bonus: Having reliable financial statements at the ready will drastically cut the time, effort, and expense you and your accounting team would otherwise�� �� �� �� �� �� �� �� �� spend trying to gather and organize all that information.)

2. Assets and Liabilities

A substantial part of assessing your company’s financial position is, of course, digging into its liabilities (i.e., its debts and other financial obligations) and assets. While an appraisal focuses primarily on tangible assets, a valuation tackles two kinds of assets: tangible and intangible.��

Tangible assets are physical things, like property, equipment, inventory, etc. Intangible assets aren’t so cut and dry.����

Intangible assets are essentially the non-physical resources your company owns. Things that fall into the intangible asset category are intellectual property (patents, trademarks, trade names, copyrights, trade secrets, etc.); digital assets (proprietary technology, databases, digital content); customer relationships; and contracts and agreements (licensing or franchise agreements and non-compete clauses), and goodwill (an inherent part of the enterprise value).

3. Key Positions, Processes & Customers

Financial statements, liabilities, assets, goodwill — even they don’t tell the whole story. A comprehensive valuation will also dive deep inside your business to look at its people and processes, evaluating critical roles and inner workings like:��

• the experience and effectiveness of your management team and operational processes.
• owner dependency — how heavily the various functions within your business rely on your involvement and presence.
• whether your company has a robust, diverse base of customers or is dependent on a few large customers. The latter poses a significant risk to your company, increasing uncertainty and impacting your valuation.����

��4. Market Conditions and Growth Prospects

Because no company operates in a vacuum, evaluating the environment outside your business is equally important to a quality valuation.

A comprehensive valuation will assess many external factors that impact your business, including its forecasted earnings and its potential for future growth and expansion. Because these external factors can drive your valuation up or down, a thorough valuation process should also include an analysis of external factors like:��

• The Economic Environment
  Stock market, capital availability, trade policies, investor confidence — the world’s financial conditions matter in your backyard. For example, when higher interest rates make borrowing more expensive, the number buyers shrinks and valuations go lower. When high inflation squeezes consumer spending, your revenue and profitability likely will go down, and so will your valuation. Lower rates and inflation, on the other hand … a much better situation.
• Industry Trends
  Industries with strong growth potential, such as tech, tend to see higher valuations, and vice versa. New or coming regulatory changes in your industry make it easier or harder to operate, positively or negatively impacting profitability and valuation.
• Your Company’s Market Position High demand for products, services, and/or businesses in your sector can drive up valuations, but context matters. What’s your company’s position in the competitive landscape? How many competitors are in your space? How strong is their business compared to yours? An experienced valuation specialist is equipped not only to consider all of these factors in their analysis but also support their findings. Their ability to provide support and documentation for their estimate is especially crucial if your business is part of any litigation.
• Valuation Methods Discounted cash flow, capitalized cash flow, guideline public company, guideline M&A transactions, net asset value — there are many methods of business valuation. Each uses a unique mathematical formula and/or approach. ��Rather than bore you with the details and distinctions of each method above, I’ll tell you what’s more important for you to know:��

• • No one valuation method is best.
  • No two valuation methods are interchangeable.
  • The data you have, the industry you’re in, the size of your business, and the purpose of your valuation determine which method will get your business the most realistic, reliable, useful valuation possible.
  • Your valuation specialist should not only have the experience to vet and select the right method, or methods, for you but also be able to provide relevant, reasonable rationale and documentation that supports their conclusion. ��

Even if you only scanned the list above, you likely have a sense of the depth of detail, research, and analysis that goes into the valuation process. Which is precisely why undertaking early and regular valuations can be such a game-changer for your business — and your transition and succession planning.����

The Benefits of Business Valuations

Because the valuation process goes deeper and broader as it considers the interplay of dozens of factors like market conditions, growth potential, intangible assets, a valuation can give you something no other business tool can: clarity and context — past, present, and future. When you’re developing your business transition and succession plan, that level and scope of perspective is solid gold. Here’s why.

A valuation:��

1. Identifies Strengths & Weaknesses: A valuation shows you not only how much your business is worth but also why, which provides useful industry benchmarks can help you determine the strengths you can leverage and the weak spots that need support.
2. Helps Set Realistic Goals: Knowing the current value of your business allows you to set achievable growth targets, allowing you to create a realistic roadmap for increasing your business’s value over time. Although aiming for the stars works great for motivational posters, it’s downright useless for business transition and succession planning; the discouragement that comes with falling short of impossible goals is far more likely to derail than motivate you.
3. Benchmarks Performance: The initial valuation provides a foundational benchmark against which you can measure your business’s performance in the context of the market and the moment. Regular valuations thereafter enable you to track your business’s progress, giving you vital information and time to adjust your strategy.
4. Optimizes Estate & Tax Planning Strategies: Knowing the value of your business early on and throughout your business’s lifecycle can help prevent potential disputes among other co-owners or heirs and needless financial loss. Regularly updated valuations:��

• • are integral to creating and updating a buy-sell agreement, which sets clear expectations for equity distribution among any partner(s) and/or wealth transfer to your heirs in case you or a partner unexpectedly dies or chooses to leave the business.
  • help you estimate (and potentially reduce and plan for) estate tax burdens that would affect your spouse and/or heirs upon your death.
  • guide you and your advisors in planning and leveraging strategic gifting — basically, how, when, and how much you’ll give to loved ones and/or causes you care about during your lifetime to reduce the size of your taxable estate while minimizing gift taxes.������

When and How Often to Conduct Valuations

By now, you’ve come to understand that a valuation is not a one-and-done item on your business’s to-do list. Or necessary only when you’re ready to sell your business. But if not then, you ask, when? The answer is actually quite simple:

1. Initial Valuation: Conduct an initial comprehensive valuation to establish a baseline as early in the life cycle of your business or, if you haven’t yet, as early in your succession planning process as possible.
2. Regular Updates: To track progress and make necessary changes, follow up with additional valuations every 2-3 years. This frequency allows you to stay informed and prepared.
3. Major Changes: If there are significant changes in your business, say, an expansion, acquisition, or market shift, considering doing a valuation outside the regular cadence, so you’re armed with information to help you navigate the change.
4. Approaching Retirement: As you get closer to exiting your business, increase the frequency of valuations to annually. This ensures you’ll have the most up-to-date information for making final decisions and, ideally, can time your exit when it’s most beneficial to your personal, business, and financial goals. ����

Your Takeaway

More than anything, I hope this article has shown you why a valuation isn’t a simple or superfluous tool, or an end-of-the-road task you tackle only when you’re ready to sell or pass down your business. When handled by an independent, experienced valuation specialist, a valuation is a vital tool to use throughout the lifecycle of your business. You can rely on it to help you understand, protect, strengthen, and guide your business through each next stage — your eventual transition and succession especially.��

If you think of the business transition and succession planning process as a path you’re plotting across a map, think of each valuation as your compass. You check it regularly to make sure you’re heading in the right direction and hitting the planned milestones. You check it to make sure that where you are on the trail (read: in reality) reflects where you “thought” you were on the map.

Should unexpected obstacles or opportunities appear along the way — and they will, because this journey takes years, not months — you wouldn’t ignore them and blindly plod along the path you’d mapped. You’d pause, consider your best options, and adjust your route accordingly. When conducted by an independent, experienced specialist, a valuation operates the same way. As you embark upon your path toward retirement, make sure you keep a valuation — regularly calibrated to ensure accuracy, of course — in your pocket.����

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About the Author: Sladjana Vojcanin has dedicated the last 30 years of her career to providing valuation services for financial reporting and tax purposes. Adept at purchase price allocations, intangible asset valuations, impairment testing, and fresh start accounting, Vojcanin also performs valuations of businesses related to interests for estate and gift tax purposes, tax restructuring, corporate planning, stock-based compensation, conversion from C corporation to S corporation tax status and employee stock ownership plan (ESOP) planning purposes. A former director in the Forensics & Valuation Services division of BKD CPAs & Advisors’ Chicago,�� Vojcanin previously spent 19 years as a director of the valuation and business analytics of BDO Consulting, LLC, also in Chicago. Boasting extensive experience providing valuation services for a spectrum of industries — manufacturing, wholesale and distribution, restaurants, construction, telecommunications, healthcare, consumer products and retail, and more — Vojcanin is one of ��ݮ��Ƶ’s most in-demand valuation specialists.��