How to Prepare for an Accurate Valuation

enterprise value

You want to sell your company and need to answer the all-important question: How much is my company worth? The company has emotional value for the founder; it also has a concrete, monetary value. Business valuations focus on determining monetary value.

Knowing your company’s market value can be helpful with taxes, financing, disputes like divorce proceedings, and determining the ownership value of a partner who leaves the business or wishes to sell shares.

An accurate valuation is crucial when you want to sell your business or to understand the marketplace better.

While it’s ill-advised to calculate your company’s value on your own, follow these three critical steps to expedite the business valuation process and get an accurate valuation.

Connect with a Business Valuation Firm

To ensure an accurate valuation, engage a reputable and reliable business valuation firm. Their expert service includes:

  • Guidance during the business valuation process
  • Subject matter expertise to ensure accurate valuation
  • Reliable support during difficult times.

Guidance During the Business Valuation Process

A business valuation firm will guide you through the complicated valuation process. These experts possess accurate audit knowledge and provide a detailed valuation report to ensure that your financial information is correct. They will inform you of all the necessary documents required to complete the valuation. A proper valuation clears doubts as to whether you have assessed your business value correctly.

Subject Matter Expertise to Ensure Accurate Valuation

Business valuation specialists have expert training, relevant certifications, and independent, objective status. Thus, they can provide efficient, cost-effective, impartial service.

Their experience conducting the business valuation for different industries enables them to provide customized solutions for your unique business. This experience results in accurate, efficient service, meaning they spend less time on the valuation process and fewer hours billed to you.

Business valuation firms ensure their professionals are up to date on methodological advancements and have access to current industry data for accurate valuation calculations.

Reliable Support During Difficult Times

If a potential buyer tries to lowball your company’s value, business valuation experts who have calculated your company’s value will verify its accurate value. The firm will support you during negotiation or litigation. Being independent, the valuation firm has no interest in favoring the other parties involved in your transaction.

The professionals at business valuation firms provide unbiased and independent opinions throughout the valuation process, and the IRS recognizes their reports. They can also testify as expert witnesses during legal proceedings. Hiring experienced business valuation advisors gains you additional negotiating power in litigation.

Organize All Required Documents

To save your time and the advisor’s time, have all the documents required for valuation ready, organized, and up to date. These documents include:

  • Financial statements
  • Existing agreements
  • Ownership and employee-related information
  • A history of the company.

Financial Statements

These include year-end financial statements like cash flows, profit and loss statements, income statements, cost sheets, expense sheets, working capital statements, business plans, etc. You should also have tax returns for up to five years (if available), the most recent monthly financial statements, and a balance sheet for each quarter for the past three to five years.

Other financial documents include the type of entity such as sole proprietorship, partnership, LLC, S-Corporation, etc., and the related documentation.

When taking your business to market, you should have the monthly financial statements for the last three years.

Existing Agreements

These include lines of credit, equipment leases, bank loan documents, debt papers, premises lease, real estate appraisal, liens against the business, litigation documents (if any) for the past five to ten years, mortgages, etc.

Ownership and Employee-Related Information

These documents include incorporation papers, ownership type and each owner’s percentage of ownership in the company, contracts with executive management and other key people, the current organization chart, etc. Share with the valuation advisor accurate information concerning the number of employees and their functions, current payroll data, and the company’s obligations for stock options, retirement plans, bonuses, profit sharing, etc.

A History of the Company

The valuation advisors want to understand the viability, liquidity, and solvency of the business and will likely request the history of your company, too. Provide documents showing:

  • The profitability of the company (both short and long term);
  • Market strategy including the company’s unique selling proposition, stable customer base, and competitive advantage;
  • Cash stability in the business;
  • The current and potential financial health of your company; and
  • Risk mitigation measures include insurance, buy-sell agreements, agreements with vendors, subscription plans for customers, etc.

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Take Inventory of Your Business Assets

Take an inventory of all your company’s tangible and intangible assets.

Tangible Assets

Consider the fair market price of all tangible assets such as real estate, office, technical equipment, tools, machinery, plants, warehouses, office furniture, company-owned vehicles, etc.

However, take care not to include assets that will not be a part of the ownership transition. These are mostly the assets that are not intrinsic to the company’s continuing operation, such as a vacation home.

Intangible Assets

Intangible assets are often challenging for owners to identify. Your company may possess intangible assets like copyrights, patents, trademarks, goodwill, logos, inventions, brand name(s), trade secrets, specialized knowledge or technical know-how, etc.

This list is limited. To know more about intangible assets, refer to our guide here!

Ensure that you keep related certificates and licenses up to date and ready for review by the business valuation advisors.

Ready, Set, Go!

Relying on specialized experience and skill is the best way to assess your company’s value accurately. Connect with a reputable business valuation firm, organize the required documents, and take inventory of your business assets. Your efforts will ensure that you get an accurate valuation.

Value Scout offers users a Smart Valuation. Get a demo to learn more and save time with our features.

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Makalyn Feaster

Makalyn Feaster

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