Whether you’re buying, selling, restructuring, or planning for the future, understanding what your business is worth is crucial, but not every situation requires a formal valuation. Sometimes, a less formal and more cost-effective approach is enough to meet your goals.
This article breaks down when a formal business valuation is necessary and when an informal valuation might suffice.
Circumstances Requiring a Formal Business Valuation:
A formal business valuation is a detailed, certified assessment of your business’ value, performed by a credentialed valuation expert, like a Certified Valuation Analyst® (CVA,) an Accredited Senior Appraiser (ASA,) or a Certified Public Accountant (CPA) with valuation experience.
These valuations follow specific standards and methodologies, and the expert’s findings are typically summarized in a comprehensive, written report. Generally speaking, businesses require a formal valuation in situations involving legal matters or when the user is relying heavily on the accuracy of the financials.
Situations when a formal valuation is usually required include:
- Buying or Selling a Business: When you are buying or selling a business (or a significant portion of a business), a formal valuation protects both parties and ensures fair market value is being assessed objectively.
- Estate Planning or Settlement: For estate planning, estate taxes, or when settling a deceased owner’s estate, the IRS often requires a formal valuation to determine the estate taxes and distribute assets.
- Divorce Proceedings: In divorce cases involving business ownership, a formal valuation is also often required by the court to fairly divide marital assets.
- SBA or Bank Financing: Lenders may require a formal valuation for certain types of financing, particularly SBA loans or business acquisition loans.
- Litigation or Disputes: In shareholder disputes, partnership dissolutions, or other legal matters, a formal valuation can serve as critical evidence.
- IPO or Investment Rounds: Startups preparing for an IPO or significant investment round may need formal valuations, such as a 409A Valuation for Stock Option Pricing to meet investor and regulatory expectations.
When a Less Formal Business Valuation May Suffice:
An informal business valuation – sometimes called a “calculation of value” or “estimate of value” – is a quicker and less costly business valuation. It uses simplified assumptions and doesn’t follow the rigorous standards of a formal valuation and can often be performed by an experienced business consultant or financial advisor.
Situations where an informal valuation may be appropriate include:
- Initial Business Planning: Entrepreneurs exploring a new venture or building a business plan might want a ballpark valuation to understand potential worth and future goals.
- Strategic Business Decisions: If you are considering expanding, restructuring, or benchmarking performance, an informal valuation can provide a rough guide without overcommitting resources.
- Exit Planning or Succession Discussions: If you are in early conversations about retirement, exit strategies, or transitioning ownership, an informal valuation can help guide planning without the cost of a full report.
- Annual Updates: Some business owners like to track their company’s value year-to-year. In these cases, an informal estimate can be useful, especially when there are no legal implications, or a pending business transfer.
- Exploratory Sale Conversations: If you’re thinking about selling your business, but not yet committed, a less formal valuation can help you set expectations and prepare for more serious negotiations later.
Final Thoughts:
Not every valuation requires a formal appraisal, but it does need to fit the purpose. Understanding the difference between formal and informal valuations ensures you are making smart financial decisions, protecting your interests, and avoiding unnecessary costs or complications.
Before deciding on the type of valuation, ask:
- Is there a legal or tax requirement for a certified value ?
- Will this valuation be used for external negotiations, financing, or a court proceeding ?
- Is this valuation for internal use, planning, or just curiosity ?
- If the stakes are high, or if legal or tax entities are involved, a formal valuation is essential.
- If it’s for planning, strategy, or early-stage decisions, on the other hand, a less formal valuation can be sufficient … and far more cost-effective !
If you are unsure which approach is right for your situation, consult with a Certified Business Exit Consultant® (CBEC) or qualified valuation expert — it’s a small investment that can save a lot in the long run !
Did you like the content in this article ? For more information about business exit and succession planning, the author has posted his entire series of business exit and succession planning articles on the media page of his website at www.greaterprairiebusinessconsulting.com.
About Greater Prairie Business Consulting, Inc.:
Greater Prairie Business Consulting, Inc. is an award-winning, national consulting practice serving entrepreneurs, small to mid-sized privately held and family-owned businesses and middle-market companies of any type with revenues between $1 million and $250 million. The firm helps small, mid-sized, and middle market companies maximize their performance and exit.
Greater Prairie Business Consulting, Inc. can be reached by calling 1-800-828-7585 or e-mailing info@gpbusinesssolutions.com.
About the Author:
James J. Talerico, Jr. is an award-winning author, blogger, speaker, and nationally recognized small to mid-sized (SMB) business expert.
With more than thirty- (30) years of diversified business experience, Jim has a solid track record and an A+ BBB rating helping thousands of business owners across the US and in Canada tackle tough business problems to improve the performance of their organizations.
His client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business. He was named “Texas Business Consulting CEO of the Year,” by CEO Today Magazine, identified as a “Top 10 Management Consulting Entrepreneur to Watch” by Entrepreneur Magazine, was listed among the “10 Most Visionary Companies to Watch” by The Inc. Magazine, and has also been ranked among the “Top Small Business Consultants” followed on Twitter.
For more than half a decade, Jim was a regular guest on “The Price of Business,” a nationally syndicated radio program on Bloomberg Talk Radio and has also appeared as a subject matter expert on many FOX Radio interviews. He is a regular contributor to several blog sites and has frequently been quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, The Entrepreneur’s Review, The International Exit Planning Association’s blog site, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim received a Gold “Stevie Award” for “Thought Leader of the Year,” a Gold “Stevie Award” for “Media Hero of the Year During Covid” and a Bronze “Stevie Award” for “Best Entrepreneur” in the Category of “Business and Professional Services” at the American Business Awards ® in New York City. The competition received more than 3,700 nominations and is the premier accolade for business excellence in the US honoring organizations of all sizes and industries. Jim also received an “Outstanding Leadership Award” at the Money 2.0 Conference for his contributions to the financial services industry.
Jim is the author of “8 Steps to Becoming an ETHICS FOCUSED ORGANIZATION,™” a small business certification program that utilizes a unique eight – (8) step approach for strengthening ethics in any organization. The certification program won the Better Business Bureau’s “Torch Award for Ethics” for the North – Central Texas Region, the International Better Business Bureau’s “ Torch Award for Ethics,” and a Gold “Stevie Award” for “Ethics in Sales” at the International Sales & Customer Service Stevie Awards®. Participants who complete this certification program are eligible to receive eight – (8) continuing education units from the University of Texas’ Division of Enterprise Development.
Jim received his Certified Business Exit Consultant (CBEC)® designation from The International Exit Planning Association (IEPA) to help entrepreneurs, small business owners, family businesses, and middle market companies maximize their business exit, and he received his certification in succession planning from the ASPE.
Jim is also a Certified Management Consultant (CMC)® and an active member of the Institute of Management Consultants. The Certified Management Consultant® mark is awarded by the Institute of Management Consultants USA (IMC USA) and represents evidence of the highest standards of consulting, a commitment to continuous development, and an adherence to the ethical canons of the profession. Less than 1% of all consultants in the world are Certified Management Consultants (CMC.)®
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