Attaching a formal value to a privately held business is a technical and often complex process. This is especially true with smaller businesses in niche industries, where there may not be many other comparable firms to analyze. If you need to know the market value of your business, most experts recommend hiring a certified or accredited professional to conduct a business valuation.
You may need a business valuation for a variety of reasons: the potential sale of the business; retirement, estate, or succession planning; the addition of new partners to the firm; the creation of an employee stock ownership plan or a buy-sell agreement; and bankruptcy or divorce litigation, to name a few.
Using a variety of research tools at their disposal, valuation professionals look at every aspect of the busines, including its financial performance, the strength of its management team, its market share, and the competitive environment in which the company operates.
Value standards vary depending on a business’s specific circumstances, and a valuation professional will know which standard to use when. For example, the most common standard, fair market value, is used in most federal and state tax matters; but other standards, such as going concern, liquidation, and net book value, are more appropriate in other situations.
Your certified public accountant or attorney may be able to help you choose the right valuation professional for your particular situation. Many CPAs even offer business valuation services, but not all CPAs are certified or accredited valuation professionals.
Several organizations offer credentials in business valuation, including the American Institute of Certified Public Accountants (ABV designation), the National Association of Certified Valuation Analysts (AVA), the National Association of Certified Valuation Analysts (CVA), and the Institute of Business Appraisers (CPA). Each organization’s requirements for accreditation differ slightly, but all require extensive training, experience, and examination in business valuation practices and techniques.
Keep in mind that the issues involved in business valuation grow more complex all the time. An accredited professional must stay up-to-date on the most recently issued valuation rules and regulations.
By choosing a certified or accredited valuation professional, you can be sure that he or she follows codes of ethics imposed by the accrediting organization. These codes require that specific standards of behavior and performance be met, for example, not deliberately discounting the value of a business to get a low number for gifting or estate tax purposes.
When other parties are involved, it’s critical that the valuation be trusted completely by all, with no charges of bias or favoritism. Accredited valuation professionals are required to remain neutral in the process of valuing a business, which helps ensure objectivity.
Finally, hiring an accredited valuation professional helps ensure the credibility of the business valuation if it were ever challenged in a court of law. An accredited professional can easily demonstrate that he or she possesses the specialized skill, knowledge, and experience required to truly qualify as a valuation expert.
Don Sadler is a freelance writer and editor specializing in business and finance.