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April 6, 2023

Top 6 Scenarios When Business Valuation is Necessary

Knowing the value of your business is vital for different reasons. It is the process of learning how much your business is worth. In that case, you can get business valuation services from valuation advisory firms based on factors like your business management, future earnings, the market value of assets, capital structure, etc. valuation is critical in different transactions involved in the business. The following are six scenarios when a business valuation is crucial.

  1. Mergers and Acquisitions

A valuation is mandatory when a company acquires another business, joins, or splits. A merger requires business valuation from both parties, while an acquisition may only require a valuation from one party. Such business valuations require the expertise of a valuation analyst. Knowing the worth of the business helps determine the right price, which allows selling or buying without losses.

  1. Exit Strategy Planning

Knowing its value is crucial if you plan to sell your business. Once you know its worth, you can incorporate strategies that will help boost its value. This way, you can sell the company at a better price.

  1. Business Dissolution

If a business has multiple shareholders or partners, it ends when at least one partner results in a dissolution. A dissolution can happen due to conflict or other related issues. In some states, a business can dissolve, merge or restructure without unanimous consent. This can lead to a dispute requiring valuations to settle the process. With a valuation, it will be possible to get a fair transaction between the shareholders.

  1. Succession or Estate Planning

When passing down succession or gifting away a business or its shares, it is crucial to know its worth. This calls for a valuation advisory to determine the value of the business. The company can be sold to third parties or an employee where ownership will be transferred. In such a transaction, the company’s value must be determined to determine what the buyer or successor gets. Business valuation is also paramount in estate planning. The representative selected by the owner of the Will must conduct a valuation to file for an estate tax return.

  1. Buy/Sell Agreements

If you are in a business partnership, signing buy/sell agreements is mandatory. In that case, having a clear idea of how much the business is worth will make it easy to sign. All parties involved in the partnership must agree on the value before agreeing. With a buy/sell agreement, one owner can acquire their partner’s interests should the partner decide to exit, retire or pass away. You will need a valuation analyst to update the price as the company performs to have an up-to-date value.

  1. Marital Dissolution

In a business owned by a couple, a valuation may be necessary if the couple is divorcing. The couple will require an equitable distribution, meaning the liabilities and assets should be shared equally. In some cases, the dissolution may consider the input of each spouse to distribute the assets. In such a case, knowing the value of the business is necessary.

Takeaways

These are situations when a business valuation is useful. A business valuation company with the proper credentials must carry out the process. Therefore, if you are in any of these situations, ensure you hire an experienced business valuation consultant.

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