Sunday, July 6, 2008

Why Should Business Owners Know and Understand the Value of Their Business?

Keeping consistent track of the business value of your CFO client is a significant CFO Service. Business owners should be kept abreast of the value of their business on a quarterly basis. Business Valuation can be utilized and needed for the following purposes:

• Obtaining financing
• Company is being acquired or merged
• Shareholder buyout or disputes
• Personal Financial Statements
• Employee Stock Ownership Plans (ESOP)
• Litigation or Divorces
• Conversion of Corporate Status from a C-Corp to an S-Corp
• For Estate and Gift Tax Purposes
• For purposes of the business Owners goal setting
• Shareholder Buy and Sell Agreements

CFOs should calculate two different valuations. One valuation I will call the Book Valuation. This is the valuation that uses the traditional metrics like sales, EBIT, cash flow and assets. The second valuation that should be made is a valuation that a strategic buyer would pay. This is a buyer who is in the same business and will be able to take advantage of economies of scale and synergies. This buyer will probably pay a higher price than the book valuation. I call this the Synergy Valuation.