If you’re a homeowner, you probably have a rough idea of what your house is worth. If you have a retirement account, you likely check the balance more often than you’d like to admit. But when it comes to their businesses, many small business owners don’t know the value of their most significant asset.
Understanding your business’s worth isn’t just for when you’re ready to sell. A proper valuation is crucial in many situations, such as preparing for the future, securing investors, or even settling legal matters. Think of it as getting a health check-up for your business—you may not need it today, but when you do, you’ll be glad you have it.
The Value of Valuing Your Business (Yes, That’s a Thing)
We get it—having a stranger dig through your financials can feel invasive, expensive, and time-consuming. But knowing your business’s value is crucial for more than just a potential sale. Here are some common (and sometimes unexpected) reasons to get a business valuation:
- Exit Planning – Whether retirement is on the horizon or you’re thinking of selling, you need to know what your business is worth to plan effectively.
- Securing a Loan – Banks and lenders often require a valuation to assess risk before approving financing.
- Attracting Investors – If you’re looking to raise capital, potential investors will want to see solid valuation figures.
- Business Insurance – Valuing your business can help ensure you have adequate coverage.
- Buyout Agreements – If you have business partners, a valuation is essential for structuring fair buyout terms.
- Tax & Estate Planning – A valuation can help you plan for tax obligations, business succession, and estate transfers.
- Divorce Settlements – If business ownership is part of a divorce, determining its fair value is necessary for asset division.
- Growth & Expansion – Regular valuations help business owners identify strengths, weaknesses, and areas with high growth potential.
Many successful business owners conduct valuations at regular intervals to ensure they’re making informed decisions about growth, investment, and resource allocation.
Business Valuation Methods: More Than Just a Guessing Game
So how do you put a price tag on your business? Professional appraisers use one or more of these three primary methods to determine a fair and accurate valuation:
1. Asset-Based Business Valuation
- Focuses on your business’s book value—essentially what it owns versus what it owes.
- Includes tangible assets (like equipment, inventory, and real estate) and intangible assets (like patents, trademarks, and goodwill).
- Liabilities are deducted from the total assets to determine net business value.
- Best for: Businesses with significant physical assets, such as manufacturing companies, construction firms, or real estate holdings.
- Example: A family-owned construction company that owns heavy machinery, trucks, and multiple properties would benefit from an asset-based valuation, as these physical assets make up a substantial portion of the business’s worth.
2. Income-Based Business Valuation
- Uses your cash flow and revenue to project future income.
- Common approaches include:
- Capitalization of Earnings Method: Best for businesses with steady, predictable income.
- Discounted Cash Flow Method: Ideal for businesses with fluctuating earnings or high growth potential.
- Best for: Service-based businesses, tech startups, and professional firms with consistent revenue streams.
- Example: A law firm with a steady stream of clients and recurring revenue from retainers would benefit from an income-based valuation. Since their value comes from future earnings rather than tangible assets, this method gives a more accurate picture of their worth.
3. Market-Based Business Valuation
- Compares your business to similar companies that have recently sold.
- Uses industry benchmarks and market trends to determine a fair market price.
- Best for: Businesses in competitive industries where recent sale data is available, such as retail stores, restaurants, and franchises.
- Example: A boutique coffee shop in a busy downtown area would likely use a market-based valuation by comparing recent sales of similar local coffee shops. This ensures the business isn’t undervalued relative to its industry peers.
Often, professional appraisers will use a combination of these methods to provide the most accurate valuation possible.
Why You Need a Business Lawyer (Not Just a Valuation Calculator)
Sure, you could plug numbers into an online business valuation calculator and get an estimate—but would you trust an internet quiz to determine your retirement plan? Didn’t think so.
A business lawyer plays a crucial role in ensuring the valuation process is accurate, legally sound, and strategically advantageous for the business owner. Here’s how:
- Negotiating the Best Terms – Whether selling your business, bringing in investors, or executing a buyout, a business lawyer can structure deals to maximize value and protect your interests.
- Identifying Legal Risks – A lawyer will evaluate potential liabilities that may impact the business’s valuation, such as pending lawsuits, regulatory compliance, or contractual obligations.
- Ensuring a Smooth Sale Process – When selling, a lawyer helps draft and review agreements, ensuring no surprises derail the deal.
- Minimizing Tax Liabilities – A business lawyer can work alongside financial experts to structure the transaction in a way that minimizes taxes, ultimately saving money.
- Protecting Intellectual Property – If your business relies heavily on trademarks, patents, or proprietary technology, legal counsel can ensure these valuable assets are properly accounted for and protected during valuation.
- Buyout and Succession Planning – In partnerships or family-owned businesses, a lawyer helps navigate ownership transitions and ensures agreements are legally binding and fair.
Real-World Examples
- Maximizing Value in a Sale: A retail business owner looking to sell discovers that an old lease agreement could reduce the business’s market value. A business lawyer renegotiates lease terms before the sale, increasing the business’s overall worth.
- Avoiding Costly Mistakes: A software startup seeks investment but has weak contract language in its customer agreements. A lawyer revises these contracts to strengthen revenue guarantees, making the business more attractive to investors.
- Navigating Divorce Asset Division: A business co-owned by a married couple is going through a divorce. Their attorney ensures a fair division while protecting business operations from disruption.
Having a business lawyer involved in your valuation process isn’t just about legal formalities—it’s about protecting your investment, securing the best deals, and making sure your hard-earned business value isn’t left on the table.
Let’s Talk About Your Business’s Future
Whether you’re planning to sell, expand, or just want peace of mind, a professional business valuation is a smart move. And when legal issues arise—contracts, sales agreements, or partnership disputes—you’ll want a trusted legal partner to guide you through the process.
Set up a 25-minute call today or email us at hello@hiattlawaz.com to schedule a consultation. We promise to leave the lawyer-speak at the door (unless you really like legal jargon).
