Every business owner has a number in mind for when it’s time to sell the business. The aim is typically a large enough windfall to fund a dreamy retirement, a philanthropic legacy, and a financially secure family.

The problem is that this number may not be grounded in reality. It might be too high, based on a passing conversation with a friend about what she was offered for her company. Or maybe it’s too low, based on a long-ago, outdated offer. Or perhaps it doesn’t reflect the impact the pandemic has had on your industry.

Where to Start

It’s smart to get a reasonable idea of your company’s value to help you make decisions about the future. Here are some things to keep in mind:

It’s not personal. If you’ve spent a lifetime building your company, you’re probably biased about its value. While your business may mean everything to you, a potential buyer is simply looking for return.

Buyers want earnings and cash flow, low risk, and high reward. Getting a handle on the hard numbers will better prepare you for strategic next steps.

Who’s buying? The idea that “beauty is in the eye of the beholder” is true for businesses, too. Your company’s value depends on the buyer.

For example, a “strategic” buyer—one who would get specific synergies from your company, such as an expanded market footprint, complementary technology, or economies of scale—would pay more than a buyer with less at stake.

What are you selling? In addition to cash flow, every business has value drivers that point to the health of the company, reduce or increase risk, and make it more or less valuable. These drivers include a diverse customer base, a strong management team, and a reliable supply chain. In addition, your company’s reputation and culture can affect potential customer relationships.

Setting your company apart makes your business more appealing to buyers.

Valuation or calculation? The type of valuation service you need depends on the purpose of the assessment. Court cases and tax filings require full valuations. For example, owners often get valuations for litigation, including divorce or shareholder disputes; tax-related issues, including bankruptcy or gift and estate planning; or preparation for sale of the company.

However, a less rigorous and less expensive service—a calculation—is useful in other circumstances.

In a calculation, the analyst and the client agree on the valuation methods and approaches to be used and the extent of the procedures. A calculation engagement results in a “calculation of value,” whereas a full valuation results in a “conclusion of value.”

You can use a calculation if you are considering retirement or sale, if you want to vet an unsolicited offer for the company, or if you need a periodic review for your buy-sell agreement.

Note that all valuation-related engagements should be performed by experienced, credentialed valuation analysts.

Next Steps

If you are interested in a valuation or calculation, contact your CPA to discuss which service best suits your company’s needs. Your CPA will discuss with you the scope of the engagement, schedule, and timing.

A valuation or calculation can be an excellent point of reference for owners looking to build value. The information you gain will help you position your company for the future.  If you are interested in determining your company's worth, contact our Business Valuations team at Dermody, Burke & Brown.

The information reflected in this article was written by Allinial Global and was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.