Rakesh Parikh, managing director and founding member of Pivot Capital, discusses business valuation from the importance to the process.
Why is a Business Valuation important?
Business owners spend a lot of time and energy trying to improve company value by developing growth plans. These plans are designed to maximize value over time.
Owners need to understand what their business is worth today. It’s important that owners also need to know what supports and drives that value. Often, owners are overconfident causes this step to either be neglected or downplayed. A business valuation usually serves as a reality check for owners with a biased or uninformed view on what their business is worth.
Why would a business owner want a valuation?
The traditional answer is that valuations are needed to resolve tax or legal issues. Business valuations are actually performed for a number of reasons, including but not limited to selling or acquiring a business. In the cases of death, disability, disaster or divorce, valuations are needed to equitably determine the business assets according to terms spelled out in legal filings.
Valuations are often needed when gifting or donating company stock as part of a charitable contribution, in resolving IRS or shareholder disputes, or when converting a C-corporation to an S-corporation. There could be requirements in a buy/sell, partnership or shareholder agreement that necessitates a business valuation.
In addition, owners would generally perform a valuation when attempting to raise strategic capital or implementing an Employee Stock Ownership Plan (ESOP). A formal business valuation can help the owner reconcile perceived opinions on value and with a marketability analysis, it can help a business owner determine relative value in the marketplace.
How does the business valuation process work?
The assessment of value is indeed an art form as much as it is a science. Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. An accurate valuation of a closely held business is an essential tool for a business owner to assess both opportunities and opportunity costs as they plan for future growth and eventual transition. It provides either a point-in-time assessment of relative value for an owner, or perhaps the price a buyer would be willing to acquire the business.
Most owners do not business plan or even plan for their own exit, and as a result, many transactions leave sellers feeling somewhat not satisfied. A thorough valuation can provide that very important starting point in strategic growth planning, as well as some important visibility for an owner contemplating the long term.
Article by: Rakesh Parikh
Rakesh is a Managing Director and founding member of Pivot Capital LLC. As a registered certified public accountant, he’s spent the past 20 years in private practice as the founder of One Capital Financial Advisors, Inc. advising clients in accounting and financial services including audits, reviews, compilations, valuations, tax advice and LLCS corporate preparation. His work also includes mergers and acquisition advisor, certified exit planning advisor to small business and family partnerships as well as due diligence in buyer-side target acquisitions.