27 Apr 2020 Ankit Chadha

Company Valuation 101: 3 Myths of Valuing a Private Business

Company Valuation | TRC Consulting

Determining the value of your business is a critical aspect of ensuring that it prospers and survives the everyday challenges. Company valuation helps you focus on ways to increase your firm's both short and long-term profitability.  

The question is, what exactly is company valuation? Company valuation can be defined as a process and a set of measures used to estimate the financial value of an owner's interest in a business. It is not limited to just selling or acquiring a business, but for multiple reasons, including gifting or donating company stock as a charitable contribution, in resolving IRS or shareholder disputes and much more. 

The company valuation process is often seen as a complex procedure, especially for private businesses, which often leads to certain myths.  

Here you will find three common myths that we have debunked: 

Myth 1: Company valuation is essential only at the time of selling the business or when a lender requires it as a part of the due diligence process 

Reality: While the business sales and lending processes require company valuation to be completed, if these events represent the first valuation completed, then you can be sure that serious business decisions and estate planning matters have not been addressed. If the firm is to have a life beyond the current owners, then effective planning for ownership transition requires a regular company valuation. It is crucial to regularly conduct company valuation to reflect the firm's financial progress over time and is certainly not limited to reselling.  

Myth 2: Your Business's worth depends on what is the valuation is used for.  

Reality: The value of a business is known as its fair market value (FMV). The Internal Revenue Service says that the FMV is what a willing buyer of the firm will pay the willing seller when both are fully informed and under no pressure to do the same. The wider the assigned company valuation FMW range is, the less reliable is the valuation and the more likely it becomes that the company valuation will face greater analysis from potential buyers or the IRS.  

Take the example of a parent selling his business to his child. Considering that the parent pays taxes on the difference among the value of the stock sold to the child and its worth on the company's books, creating a low value on the firm's stock results in the parent lessening the capital gains tax payable to the IRS. Such transactions are common, and the IRS is always looking for mishandlings.? 

Myth 3: Businesses in your industry always sell for two times annual revenue. So why should you pay someone to value your business? 

Reality: The quick answer is that statistics on the selling prices indicate that revenue multiples within an industry, which are generally on the higher side. Such rules of thumb used by business brokers, the individuals who often handle private business transactions, use multiple median values. The median value shows that half of the revenue multiples are below the median value. Thus, the median value is just a suitable midpoint and does not represent the revenue multiple for any actual transaction. Unless the company that is being valued is truly median, then using the industry rule of thumb for this purpose is wrong. 

Company Valuation: Key to Growth 

Every business – private, public, limited liability, must obtain an accurate company valuation assessment from time to time. You, as the company's owner, may have an over-all idea of what your business is worth, based upon general data. However, there is much more to the company valuation than the simple factors. We, at TRC Corporate Consulting, ensure that the correct numbers are provided after thorough company valuation. ?We follow best practices, include our deep industry expertise and unparalleled collaboration for enabling optimal results for your business growth. We are associated with an extensive professional services network to serve all your company valuation needs. Contact our team at TRC for further understanding. 

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