Business Valuations (How to Value a Business)
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Reasons to Value a Business
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There are many reasons to value a business including, but not limited to:
  • Purchase or sale of a business
  • Mergers & Acquisitions
  • Dissolutions – i.e. termination of the business
  • Divorce – if one spouse owns part of a business and wants to sell the business (or his or her share of the business)
  • Buy-Sell Agreements – often used to determine what the business may be worth in the future
  • To obtain financing – if a person or entity wants to obtain financing from a bank and use his or her business as a way to secure a new loan
  • Litigation – if a person or entity is involved in a lawsuit, the value of the business may come into play
  • Tax reasons – the IRS may require a business to be valued in order to determine what gift and/or estate taxes must be paid
As you can see, businesses should be valued for more than just the purchase and sale of the business. The reason you’re valuing a business can dramatically change what value you’ll come up with for the business.

For example, the value of a business in a merger or acquisition will likely be higher than if you’re valuing the business for its dissolution, i.e. termination. Why? Because in a merger or acquisition there is another company taking over the business. In other words, another business actually wants that business. In the dissolution of a business, no one is actually buying "the business." Instead, generally just the assets, i.e. things owned by the business, are being sold (and often at a highly discounted rate). So, the value of a business at its dissolution tends to be much lower than in a merger or acquisition (or other reasons).

So, keep in mind that the reason for the business valuation can completely change the outcome of the business valuation.

Next, we’ll take a look at some common misconceptions related to business valuation.

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