Valuations: When a Valuation Makes Sense
It's always enticing to contemplate finding out exactly how much your business is worth. But it seldom makes sense to pay for a full-scale valuation -- which might set your company back by $10,000 to $15,000 -- unless you fall into one of these categories:
? You're preparing to give away stock (or carry out other estate-planning strategies). "In this case, you need a full-scale valuation, complete with all kinds of documentation, because you or your estate may be challenged one day by the IRS," warns Edward Telling Jr., a business broker and appraiser in Syracuse, N.Y. "The valuation needs to be performed according to very specific IRS standards," he cautions. Make certain it's timed to coincide with the actual estate-planning activity, so it won't seem out-of-date if you wind up in tax court.
? You're planning an initial public offering. If you're contemplating a public sale of stock (or even a private placement of debt or equity), you'll need a fairly precise sense of your company's fair market value. But you've got two choices here: "You could hire a valuation expert yourself to help you decide if the company's ready, or you could wait until you've attracted an investment-banking firm and then rely on it to orchestrate the appraisal," Telling says. A Big Six accounting firm's stamp will impress potential investors but will also be pricey.
? You're trying to qualify for a bank loan. Lending institutions set their own guidelines for when they need business valuations to support loans -- and which standards must be followed. (Generally, those vary by industry, company size, and other details, such as whether there's an employee stock ownership plan.) Let your banker tell you what's needed; preordering a valuation will probably be unnecessarily costly.