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Reasons to Value a Business

by: Dennis Goldstrand

There are various important reasons to value a business.  The value of the business may be the largest asset in your overall financial portfolio and that asset will have a significant impact on lifetime retirement income.  It is also a critical part of your business strategy. 

Preparing to sell the business.  Knowing the business value to be prepared to market it, respond to unsolicited offers or unforeseen events.  Knowing the range of valuations allows you to be in position of strength when negotiating the most favorable price. 

Establishing a value for a buy-sell agreement.  Having a purchase price set before a triggering event will minimize the risk of disputes related to the agreement. 

Other reasons to have a business valuation:   

  • Obtaining equity or debt financing
  • Risk assessment and insurance 
  • Estate planning
  • Strategic business planning   

The value of the business is generally based on assets from the balance sheet and earnings reflected on the income statement.  Factors that can influence the value are: 

Economic Outlook.  The general economic outlook and condition of the industry the business operates.  Considerations are: is it a growth industry; how competitive is this company within the industry; and what would be the economic effect of the loss of key employees. 

Earning Capacity of the Company.  Earning capacity is average earnings over a five-year period multiplied by a capitalization rate. 

Goodwill and Other Intangible Values.  Goodwill is based on earnings capacity.  It represents an excess of net earnings over and above a fair return on the net tangible assets of the business. 

Other intangibles include: value of similar businesses that have sold; ownership of a trade or brand name; reputation of the business; and prolonged successful operation in a particular locality. 

 

Dennis J. Goldstrand, CLU, ChFC, AEP of Goldstrand Planning Group is an associate member of the association.  He is offering a business valuation to members at a discounted fee.  He can be reached at 800-507-9911 or dennis@goldstrand.com.
www.goldstrand.com   

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