For business owners, knowing the value of their business is important. If the owner is looking to sell the business they naturally hope for a high valuation. In other cases, a high valuation can secure better insurance policies and bigger loans at lower interest rates.

How a business is valued will often be influenced by the purpose of the valuation. For example, if one partner wants to buy out another, he or she will want to do so at the lowest possible valuation. The other partner will naturally want to sell based on the highest possible valuation. In either case the valuation must be realistic and in good faith, but different valuation methods can produce different results.

The type of business being done can also affect valuation. Businesses that make actual physical products and carry inventories are usually valued based primarily on their tangible assets, but firms that provide services are often valued more by their cash flow and market potential, estimates that are often harder to make. It is also important to remember that the value of a business changes over time, and valuations should be updated accordingly.

Owners of family businesses who want to pass them down from one generation to the next have unique needs when it comes to valuing a business. Those needs include minimizing gift and estate taxes. In this context the valuation of the business should be coordinated with the overall estate valuation. With professional legal and financial help a family business owner can develop an estate planning strategy that includes keeping the business in the family.

Luis E. Barreto