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 * What is a Business Valuation, and How Much Does it Cost?

business valuations
November 18, 2022 / IntelekSiteAdmin / 0 Comments

WHAT IS A BUSINESS VALUATION, AND HOW MUCH DOES IT COST?

In order to understand What a Business Valuation Costs, we need to understand
the fundamentals of a Business Valuation. What the service entails and what
value does it provide, from there you can identify a cost for that valuable
service.

Business Valuation is the process of finding an objective measure of the
business’ sale price or total inherent value. While differing valuation methods
can adjust the scope based on their applicability to the case facts (i.e., some
are based on the cash flows or income generated in the future, and others purely
on net-asset-based metrics), the fundamental meaning and purpose of business
valuation remain the same.

These objective methods of valuation help business owners in many circumstances:
measuring growth over time, serving as an inducement to invest, due diligence on
a potential sale (buy or sell), or during legal proceedings. All of these are
some—but by no means all—circumstances in which business valuation is necessary.


WHAT DOES A BUSINESS VALUATION LOOK LIKE?

Without diving into a methodology we’ll cover in a future post, standard
valuation processes tend to follow similar sequencing when you outsource to
experts. The reason for this is that they operate using an industry-accepted
framework, trying to achieve a baseline quality of valuation.

 1. Consultation: this helps the firm get to know you and your needs in order to
    build a plan of action for the proceeding steps
 2. Data collection: a critical stage, the firm’s data collection means diving
    into your financial statements and working with you to identify hidden value
    and assets, such as intangibles. This stage of the process includes both
    quantitative and qualitative data.
 3. Research and education: some methods require an in-depth understanding of
    local market forces and industry norms, so the best firms will ensure they
    understand both the market scope for your business and how your competitors’
    assets and liabilities compare
 4. Risk analysis: no investment is free of risk, and your business needs to
    have its risks accurately identified and quantified
 5. Execution: this is the number-crunching phase, in which steps 2, 3, and 4
    feed complex, tailored models to determine your accurate business value
 6. Report finalization: the due diligence portion, this step is the firm’s
    chance to double-check facts and assumptions, then package the final report
    in a comprehensive and defendable deliverable
 7. Delivery: this is the final step, and the firm should present the report in
    its entirety while allowing for follow-up questions and refinement, if
    necessary. The best firms will also ensure that you can maintain a line of
    communication moving forward for further questions or assistance





WHAT IMPACTS THE COST OF BUSINESS VALUATION?

Although not the most universal answer, the simple fact is that business
valuation costs vary wildly depending on a few key factors:


SIZE, COMPLEXITY, AND SCOPE

The larger the business and the more business units, assets, debt, complex
capital structures, and other balance sheet items to factor in, the costlier a
business valuation will be. Industry and type of business matter greatly, too.

Industrial, manufacturing, retail, or inventory-heavy sales companies tend to be
easier to value. The high number of physical, tangible assets means that the
firm can quantify each value to arrive at a total, objective valuation.

Software, data analytics, and many technology firms tend to be harder to value
and, thus, more expensive, as they require more expertise. Intangible assets
like brand identity, data, intellectual property, and similar tend to be more
challenging to price accurately.

Suppose you go a cheap route and self-value or use your local accounting agency
and misprice your intangibles or can’t justify the number. In these cases,
you’re doing yourself and your business a disservice. That difficulty means
soliciting advice from experts in business valuation and intangibles is
critical, and this is particularly true if you need the valuation to stand on
its merits during sale negotiations or in court.

And, like intangibles, if your firm has a complex capital structure that
includes advanced debt or equity instruments like convertible bonds or warrants,
then valuation will be more difficult and require expert assistance commensurate
with complexity.


OUTSOURCING

If you elect to self-evaluate your business value, the highest cost will be your
time—assuming you value it correctly. If you misvalue the business, you will
almost certainly pay an opportunity cost later, and/or an actual cost, if the
end number is part of negotiations or proceedings. This would be considered
putting a sign on your back, inviting the IRS or opposing attorney to attack.

A low-cost route is working with a local firm to conduct business valuation as
part of standard accounting packages. This is feasible—especially for tiny
businesses that primarily operate locally or regionally—but the likelihood of
your local CPA struggling with correctly valuing your business rise
exponentially alongside your company size and scope. And, as with
self-valuation, the time and opportunity costs quickly outweigh the financial
costs if you go this route.

Finally, outsourcing to a reputable valuation firm is often the priciest but
most cost-effective option for all businesses. If you choose correctly, the firm
stakes its reputation on its analytical accuracy, potentially saving you
thousands or even millions of dollars from improper taxation, penalties, and
additional fees. You also save time when you work with professionals exclusively
valuing businesses in a way that lets you focus on what you do best, which is,
of course, operating your business.


WHAT DOES A BUSINESS VALUATION COST?

Again, valuation costs vary according to many factors. And, if you outsource to
a reputable service, they’ll tailor the price to your situation rather than use
a blanket pricing model.

But there are a few commonalities in pricing structure that allow business
owners to envision a general cost based on their circumstances.


FIXED PRICE

Fixed-price structures are common for firms that apply cookie cutter techniques,
regardless whether your business valuation needs are very simple (and in this
case you will probably overpay) or if they are complex or serious purposes, such
as tax compliance or litigation (and in this case the product simply won’t be
sufficient, which increases your risk for additional costs later).


HOURLY RATES

Hourly pricing applies when data is disorganized, complex, nuanced, deep
financial analysis is required, or the product must be highly defendable, such
as in litigation or divorce proceedings.


MARKET RATES

Starting at the bottom, using a valuation software may be as little as
$500-$1,500

 * For the simplest businesses conducting a valuation for internal exploratory
   purposes, a quality valuation can be as low as $3,000-$5,000
 * For the same simple business that needs a valuation to submit to the IRS for,
   say, estate tax purposes, the cost can be as low as $6,000-$7,000
 * For businesses that increase in size and complexity, with multiple business
   units, valuing minority interests (e.g., 40%), or various instruments such as
   preference shares or warrants, this can quickly increase to $15,000-$20,000
   or more
 * Should you wish to have a large, brand name accounting or consulting firm
   conduct the same valuation, this could easily cost upwards of
   $50,000-$100,000 or more, (but this is not where the value play is)

What you need to do is ensure you receive the right product for your valuation
needs, and have it justified by the appraiser regarding the value you will
receive.

#business valuation cost #Business valuations #how much a business valuation
cost #prices for a business valuation #What is a business valuation


Author

INTELEKSITEADMIN





ENTERPRISE VALUE

September 14, 2022

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November 18, 2022

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