By Iván M. Mendoza, CFA, CFP, CLU, ChFC, CDFA
Business valuation is far more than just an intriguing data point; it’s an integral part of a thriving business with far-reaching implications. Whether you’re a business owner, an experienced entrepreneur, a rising start-up founder, or even an employee with stock options, understanding the value of your company is critical.
Beyond the basic curiosity of knowing the “worth” of your hard work, business valuation is important for making pivotal choices, like obtaining loans, attracting investors, forming partnerships, and planning for the future.
13 Compelling Reasons for a Business Valuation
Let’s review 13 compelling reasons why a proper business valuation is essential for navigating the complexities of the business world.
- Full exit: Many wealthy individuals make their fortune this way. They build a company and then sell it for a huge profit. Could you accomplish this? Perhaps. Is it possible to accomplish this without a business valuation? No.
- Partial exit: A partial exit is when someone purchases a portion of your company’s stock, allowing you to remove some cash from the sale. You need an updated business valuation every time a transaction like this occurs.
- Investment: When someone invests in your company to help it grow, they need to review your valuation, investor memorandum, shareholders’ agreement, and business plan to get an accurate picture of their investment in your business.
- Restructuring: An independent appraisal is likely needed if you’re buying out shareholders, switching jurisdiction, altering your legal entities, or acquiring new businesses to join your existing ones.
- Acquisition or share-swap: If your company is purchasing a complementary company and exchanging cash or shares, you should value both businesses to confirm the deal is finalized correctly.
- Business continuation planning: Business valuation provides the calculation for buyouts in the event a partner passes away. A Buy-Sell agreement funded with life insurance helps to protect the surviving heirs by receiving a lump sum to buy out the remaining partners. This also helps the partners continue with the business without having the former spouse and or kids as new owners.
- Business succession planning using ‘estate-equalization’: This is a technique used when one child is set to receive the business. The grantor would like to treat their children equally. The business valuation helps clarify what assets should go to non-business heirs.
- Personal divorce: If you or one of your major shareholders gets divorced, the shares are most likely to be included in the settlement, so having a valuation on hand helps confirm all your options are open. You don’t want to be shocked to learn the opposing side has done their research and developed a value you disagree with.
- Establishing an employee pension plan: Everyone loves the idea of having employees who treat the business as if it were their own. But you can’t anticipate your workforce feeling that way if it isn’t the truth. Excellent performance cultures can be fostered by employee incentive programs, particularly when workers can see the value of their stock increasing.
- Tax planning: A business valuation could lead to additional gains you might not otherwise be eligible for, and wealth builders make plans in advance to pay the least amount of taxes required.
- Insurance: In the event of an unintentional loss, more than 70% of small companies lack adequate insurance and are unable to recoup lost value. If you were ever injured or wrongfully distracted from your business, a historical valuation could be worth real money for you, especially if you have taken this into account when making insurance policy decisions.
- Managing multiple business assets: If you own stock in several private companies, you probably won’t know how much your portfolio is worth until the businesses sell, which could take years. A smarter approach is to value the companies on a regular basis and keep an eye on the portfolio over time.
- Satisfying your curiosity: Let’s face it, who doesn’t want to know how much their company is worth? You should be aware of its value because it might be your most valuable asset. Key performance indicators (KPIs) and business valuation act as a routine health checkup for your company.
Consult With a Professional
To optimize the worth you get from your business, you need to work with a professional financial advisor to get a proper valuation. Measured assets tend to improve, and business valuation is no exception.
At Mendoza Private Wealth, we specialize in supporting small business owners in Miami and across South Florida, with a particular focus on guiding pre-retirees through their unique financial journeys.
Would you like to get in touch? Please schedule a Fit Meeting here. We look forward to hearing from you.
About Iván
Iván M. Mendoza is the Managing Principal and a Financial Advisor for Mendoza Private Wealth, a fee-only boutique, private wealth management practice with a focus on research, planning, and investment management. Working with clients in Miami and throughout South Florida, Iván provides investment and wealth planning advice to individuals and families and to their respective trusts, estates, foundations, endowments, and pension plans.
Iván began his career with Prudential in 1999, where he quickly advanced to Manager of Financial Services, overseeing a team of financial planners. In 2012, he joined Sanford C. Bernstein’s private client group as Vice President and Financial Advisor. Driven by his commitment to providing objective advice, he founded Mendoza Private Wealth in 2016. Iván holds multiple designations, including CFA®, CFP®, CDFA®, CLTC®, CLU®, and ChFC®, and is passionate about creating confidence in clients through sound financial planning and investment strategies.
A first-generation American of Peruvian heritage, Iván resides in Miami with his wife, Ana, and their two sons, Emiliano and Alessandro. He enjoys traveling, discovering new restaurants, all things science, World Cup soccer, and staying active through running and biking. An advocate for education, he draws inspiration from his grandfather, a former Minister of Education in Peru, and supports educational causes in his community. Iván is also a music enthusiast with a wide range of tastes, from jazz to reggae to heavy metal. To learn more about Iván, connect with him on LinkedIn.
