Why You Need A Business Valuation – Even If You’re Not Planning To Sell

Why You Need A Business Valuation  – Even If You’re Not Planning To Sell

“Why would I need a valuation? I have no plans to sell.”

Planning to sell may be the biggest motivator for getting a valuation, but it’s not the only situation that calls for it.

In this article, I’ll outline a few scenarios where knowing the value of your business is crucial. Then, I’ll explain the difference between a Broker Price Opinion and a Certified Appraisal, the two main types of Business Valuations.

There are hundreds of scenarios where you need an accurate picture of your business’ value. Some of them are less than ideal:

• An IRS audit 
• A legal dispute between business partners 
• Business Torts
• Divorce
• Bankruptcy
• Economic Damages
• Dissenting Shareholder Disputes

I don’t want to be a buzzkill, but these are real-life situations.

And if one of them picks you as its next victim… you better hope you have a recent, certified appraisal at the ready.

Having a valuation is a lot like having a will. A healthy person in their thirties may see it as something they can put off. But they leave their family in a legal mess if disaster does strike.

Before you think I’m just drumming up fear… it’s not all doom and gloom.

There are also positive reasons — aside from planning an exit — to bring in a specialist to run a detailed valuation of your business:

• Estate planning
• Gift giving
• Bringing in new investors
• Buying out a partner because they’re 72 years old and just want to fish all day.

These are all excellent scenarios in which you’ll need a valuation. Along with these, we should not forget one major motivator:

The need for clarity.

 

Getting Clear on the Numbers

The longer you’ve been running your business, the harder it is to evaluate how that business is actually doing. 

It’s simple to open your banking app and check up on your cash reserves. It’s equally easy to check on your investment portfolio. But there’s no app or online portal that can show you the value of your business at-a-glance. 

Shouldn’t you have the same read on what likely is your biggest asset?

An accurate valuation gives you a sense of progress as a business owner. It helps you make decisions grounded in data rather than your gut feelings. . 

Owners are constantly making emotional valuations of their businesses. Get too passionate about what you’re doing,  and the value will be overinflated. Dwell too much on the problems in your business, and you’ll start mentally selling yourself short.

In either case, running on emotions and guesstimates impacts how you work on the business. Getting the numbers from an experienced, unbiased appraiser will only strengthen your ability to make decisions for the future. Even better? An appraiser who is also experienced in actual business transactions. 

If the desire for clarity motivates you to get a valuation, there are two options for you:

• Certified Appraisal
• Broker Price Opinion (BPO)

The certified appraisal is the one most people are familiar with. This is where a valuation expert performs the analysis based on set standards.

The BPO doesn’t follow these standards. All you’re getting is the broker's opinion based on current market conditions.

Let’s break down when each option is right for you:

 

When You Need A Broker Price Opinion (BPO)

Sometimes, you don’t have to go for the full certified appraisal. In many cases, all you need is a BPO.

Because BPOs don't apply to any particular standards, they have no legal weight to them. They’re just opinions. That said, when I perform a BPO for clients, I’m using my tools and experience as a business intermediary to calculate the most likely price (or range) their business could sell.

Will it be accurate? Yes.

But will it help you in a legal dispute or spar with the IRS? No.

That’s why a BPO will cost you a third of the price of a certified valuation (I’ll charge my clients between $3-5k, situation-dependent).

It’s like attending a university class you aren’t enrolled in or paying tuition for. All the knowledge is yours to use; you just won’t have the degree to prove you attended the course.

If you’re just trying to get accurate numbers for your own purposes, a BPO is all you need.

It’s even useful if you're going through good-faith negotiations with business partners, family, employees, or even third parties. Amongst friendly parties, a BPO taken from a broker everyone trusts gives everyone clarity on the facts.

A lot of business owners who wish they could have an updated valuation for purposes like these put it off because they don’t know that this less expensive option is even available.

BPOs are awesome. If I was a doctor, I’d regularly prescribe them.

But there are some scenarios where you have to give it the whole nine yards.

 

When You Need a Certified Appraisal

This is where the certified appraisal comes in.

The certified appraisal is a full, detailed valuation of your business. 

This valuation follows cut-and-dry standards. The smallest lapse in compliance means that the entire report is invalid. Get this appraisal done by a licensed professional and the end result is bulletproof.

This is your armor in the unfortunate situations I’ve hinted at above.

If there is any potential that the value of your business is soon to be challenged in court… we need to get you a certified appraisal.

Otherwise, you go into court unable to plan without even knowing what you’re defensible against. 

IRS lawyers could walk in knowing more about your business’ numbers than you do (making you a sitting duck).

A soon-to-be ex-spouse could drastically inflate what your business is worth (leaving you drowning in alimony). 

The battle between you and a partner could go months without resolution (because nobody knows exactly what’s being fought over).

However the business owner with a certified appraisal will always have the last word in an audit, dispute, or debate. 

And no matter how defensible the numbers make you out to be… you are always better off knowing them.

If you’re staring down the barrel of a situation like this, we need to get you a valuation ASAP. Nothing motivates a valuation like a lawsuit on the horizon.

Hopefully, this doesn’t describe your current situation…

And you’re looking into a valuation because you have a simple question on your mind: 

“I just want to know what the business is worth.”

Beyond planning to sell, this should be the primary motivator for most business valuations. But it isn’t because business owners don’t think of getting one until it is necessary.

 

To recap:

• Planning to sell is one of many reasons you should get a valuation.
• Having an up-to-date valuation gives you clarity above all else.
• In cases where your valuation will not be disputed, a cost-effective BPO is all you need.
• If a lawsuit is in your future, a certified valuation will tell you exactly what you’re defensible against.

And, most importantly:

Knowing why you need the valuation will let you know what kind of valuation you can get.

If you’re looking for an unbiased third party to handle your valuation — whether you need a BPO or a certified appraisal — book a consultation with me, and we can talk through your current situation.