As a business owner there are many things you must understand about your business—its profitability, industry, market and strengths and weaknesses. How about its worth? The likely answer is that you probably don't know its worth. But should you care? Absolutely!

Why get a business valuation?

Throughout the life cycle of a business there are many occasions that give rise to the need to know its value. That's where the process of valuing a business is required. It's a circumstance-driven service that is recommended when:

• A business owner wants to either add or eliminate a partner.
• As a requirement under the terms of a company's buy/sell agreement.
• A business owner is getting a divorce. According to Joel Charkatz, a partner at the Leading Edge accounting firm of KAWG&F in Baltimore, Md., "The business is something this owner has built and nurtured while the couple was married. The courts will require a valuation of the company to settle the marital estate."
• A business owner wants to begin gifting part of the business to his or her children. A valuation will be required in order to properly plan the amount and timing of the gifts and for filing gift tax returns with the Internal Revenue Service.
• A business forms an Employee Stock Option Plan (ESOP). A valuation must be conducted at inception of the plan and at least annually to determine the value of the stock held by the ESOP in order to comply with federal regulations.
• A business owner decides to retire and sell the business to his or her children. A valuation will be required to determine the appropriate price and to avoid unexpected gift tax consequences.
• A competitor approaches the business owner with an offer to buy the business. A valuation may be required to determine if the price offered is adequate.
• A business owner dies. A valuation must be conducted in order to determine the value of the decedent's estate for estate tax purposes.

What is the value of a business?

There are many standards of the value of a business. The most common standard is fair market value, the price at which property will change hands between a willing buyer and a willing seller, each with knowledge of the relevant facts and neither under compulsion to consummate a transaction. In other words, according to Charkatz, "You are trying to determine what your business will sell for if you put it on the market."

Other standards of value include fair value (a legal standard used in a litigation context), investment value and synergistic value. These standards typically relate to situations where the value to specific buyers and sellers are contemplated.

These other standards exist because if you have a specific buyer or seller, the asset may be worth more, particularly if it allows you to eliminate a competitor or increase your market share.

Who can perform valuations?

Professionals with specific training from accredited organizations generally perform business valuations. Many receive certification from organizations such as:

• American Society of Appraisers - Accredited Senior Appraiser (ASA)
• National Association of Certified Valuation Analysts - Certified Valuation Analyst (CVA)
• Institute of Business Appraisers - Certified Business Appraiser (CBA)
• American Institute of Certified Public Accountants - Accredited in Business Valuation (ABV)

"If you are having your business evaluated to determine its value, you want someone who knows how to accurately assess that value. Often your CPA or business adviser can refer you to someone with that expertise, either within the firm or with an affiliated organization," says Charkatz.

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