Business Financial Information Secrets

CHAPTER 15Business Valuations – Why and How?

WHY VALUE A BUSINESS?

Let us start with the first and most relevant question: Why are business valuations even necessary? Basically, it comes down to one of the following four primary reasons:

1. Liquidity event: It should be relatively obvious that for most (but not all) business there comes a time to achieve a liquidity or exit event (clever names for selling the business). Although companies can achieve a liquidity event through undertaking an initial public offering (i.e., IPO) on a large stock exchange such as Nasdaq, this is generally reserved for the largest multibillion‐dollar organizations. For most smaller businesses that generate annual sales measured in millions of dollars, outright sales of a business are usually more effective strategies to achieve a liquidity event.

   The motivations for business sales vary and may arise for any number of reasons, including business partners wanting to be bought out, early investors looking to cash out, a family‐owned business that has reached the end of the line (i.e., no further heirs left to operate the business), a group of employees wants to buy the business from the founders, or a change in market conditions necessitates the sale of a business, to name a few. To achieve a fair and equitable sale of a business, a proper valuation must be established.

2. Raising capital: As discussed in Chapter 13 (capitalizing a business), companies frequently must raise capital to finance ongoing operations ...