What is the purpose of a Business Valuation?
*This is a transcript of the Facebook Live video from 6-8-18 Click here to watch the video.
A business valuation is basically a process by which some outside party, perhaps … there’s certified business valuators out there, accountants. There are a number of different professionals that can provide a valuation, and they can come in and tell you what your business is worth, and so if your business is worth $1 million and you own 10% of it, then in theory, your value is $100,000. There are many factors that can affect the value of the business. If it’s a closely held business, what is the market for your shares?
That may reduce the value of your shares because there’s just not a market for them. The only other market is sitting across the table from you. Some businesses are highly marketable, and people are willing to buy in and out of those businesses, and those valuations are usually pretty accurate. One of the things you want to do in a buy sell agreement is have a clear and articulated method by which the company is going to be valued. I really urge people to do regular valuations of their business either annually or every two years for banking purposes or insurance purposes, but also for this buy sell purpose so that everybody agrees on what the company is worth, and everybody knows within a few months what the value of the company is.
If you’re trying to exit the business in June, and you have a valuation done in January or March, then that’s probably a fair valuation for that business, but if you haven’t had the business valued in 10 years, that valuation probably is worthless. It certainly is going to be subject to criticism by whoever is disadvantaged by that valuation. You want to find someone to value your business or either who has a tremendous amount of experience valuating businesses of all kinds or someone who has tremendous amount of experience valuating businesses in your particular industry.
Depending upon how specific your industry is, that will dictate whether you go with the former or the latter, but it’s important to get a handle on that as soon as you can. I’ve seen these types of cases come and go, and at some point what you hope for is that someone’s business judgment jumps in and stops the spending because these cases can be very expensive. There usually are allegations of dishonesty, misappropriation, bad business judgment. All sorts of things can get very nasty, and what you hope is that at some point the partners can sit down, put some of that behind them and try to work the math problem out of how much is this business worth, what’s a fair amount to pay the departing member and let’s pay them and let’s move on with our lives.
Long protracted litigation only hurts your company, probably hurts the shareholders, and might marginally help the lawyers who are getting paid, but usually, the lawyers, if they’re good, they want to see the situation resolved, not litigation perpetuated. That is a thumbnail sketch, tip of the iceberg discussion about business divorces. They can be very painful. They can be very difficult, and one of the things that we try to do here at the Crone Law Firm when we represent people on either side of a business divorce like that is to really try to help them deal with the emotional side of it because it is, depending upon the kind of business that you’re dealing with and how long the people have been involved, a very deeply personal thing.
We respect that and understand that and want to validate that, but at the same time, it is a business transaction, and one thing we try to do is to help our clients get past the emotion, deal with the emotion, but let’s focus on a business workout of this problem that’s beneficial to our client but also is the kind of resolution that the other side will agree to so that everybody can move on with their lives.