Building Your Business Becoming an Owner Business Types Why Is a Business Valuation Important? By Jean Murray Updated on September 13, 2022 Fact checked by Hilarey Gould In This Article View All In This Article What Is a Business Valuation? Why Does Your Business Need a Valuation? You'll Need a Business Appraiser Business Valuations of Closely Held Corporations What’s Included? Frequently Asked Questions (FAQs) Photo: Janie Airey / Getty Images Every business should have on hand a business valuation, which is updated every year. Like a current resume and business plan, a current business valuation can allow you to take advantage of opportunities, protect your family in case something happens to you, and allow you to move quickly if and when you are ready to sell your business. Key Takeaways Having an up-to-date valuation of your business is important because it can protect you from anything that might change your business’ valuation in the future.You’ll need a business appraiser to do a business valuation.The value of closely held corporations must be done on a case-by-case basis, because it’s difficult to get a value for its stock.A typical business valuation includes information about the business history, financial statements, assets, and external business conditions. What Is a Business Valuation? A business valuation is a process of setting the value of a business for several different purposes. A business might be valued before it is sold, or to determine the value before or after a disaster impacts it, or before going public. Why Does Your Business Need a Valuation? There are a lot of reasons your business needs a valuation. Several are listed below, and there be others that we're not even aware of yet: Things Happen In business as in life, some events are unpredictable. Just as you should always have a resume ready for a job, and you should keep your business plan updated, you should prepare a business valuation and update it every year—just in case. Unexpected Events That Impact the Business Owner Something could happen to the business owner, like death or becoming disabled, forcing the sale of the business, or a change of ownership. Knowing the business value can help you sell it. Opportunities You might be able to take advantage of an opportunity, like an unexpected invitation to sell the business or to participate in a joint venture. Change in Partnership Your partnership might want to add a new partner or when a partner leaves, you will need the valuation to determine the buy-in or buy-out price. Owner Exit You may be thinking about leaving the business. Getting a business valuation is one of the first steps in creating your exit strategy. Expansion To expand your business with a loan or new equity, you may need a business valuation to present to a lender or investor. Disaster When a business disaster happens, you’ll need to value your business for insurance and federal disaster assistance purposes. Life Events Personal life changes like a divorce can also trigger the need for a business valuation. Note Don’t wait until something happens to get a business valuation. In a disaster situation, for example, it’s important to have a pre-disaster valuation to document the amount of the loss. You'll Need a Business Appraiser To Value Your Business An appraiser is an individual who estimates the value or worth of something. An appraiser sets a value on a property or other assets, including the assets of a business. A business appraiser is different from a residential property appraiser. They have different skills and look at different types of assets and situations. To find a certified business appraiser, see the Institute of Business Appraisers for a searchable list. Business Valuations of Closely Held Corporations Many small businesses are closely held corporations, in which a relatively limited number of stockholders have all the shares of stock. Oftentimes, the members of just one family hold all the shares, and there is little or no trading in the shares to establish their value. Getting a business valuation for a closely held corporation depends on coming up with a fair market value, but since there’s no trading of shares, there’s nothing to establish a market value. In these cases, the appraiser will need to look at financial data and other relevant factors, like stock values for similar businesses, and general economic conditions. What’s Included in a Business Valuation Document? Business valuation documents come in many varieties, depending on the type of valuation being done. Here are some key topics reported during a valuation: Introduction The first part of the document includes: A description of the assignment The standards used (like fair market value) The scope of the report (what parts of the business are included) Information sources Business Description and Industry Overview This section includes a history of the business and its place among similar businesses. Financial Statements The report presents and discusses the business’s financial reports, including the balance sheet and income statement. Valuation Methods This key part of the report gives an overview of the methods used to analyze the business situation. It shows the values based on the types of methods used for the valuation. Most appraisers use asset-based, market-based, and income-based valuation methods. Conclusion The appraiser gives their conclusion and an explanation of the decision. They present an overall valuation and a justification for the value set on the business. Note If you have a simple business, you might want to consider using business valuation software like ValuAdder to prepare a business valuation. You’ll still need an appraiser to run the valuation analysis. Frequently Asked Questions (FAQs) What are the methods of valuation? Two common business valuation methods are asset-based and market-based. In asset valuation, individual assets are valued and combined for a total valuation. This approach considers both going concern (continuing operations) and liquidation (selling all assets) situations. Market valuation looks at data on similar companies that have been sold and their location, similar to what realtors do in setting the price of a home. In both types of valuation, you’ll need the help of a certified business appraiser. How do I calculate my business value? A simple way to calculate business value is to look at the owner’s equity, assets minus liability. If a business has more assets than it has liabilities, the value is the amount available to the owner. In a public corporation, the same calculation applies to stockholders’ equity. It’s the money left over after the company sells off all its assets to pay off liabilities. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Revenue Ruling 59-60." Deloitte. "Reading Between the Lines: The Merits of an Asset-Based Approach to Valuing Businesses." ValuAdder. "Sample Business Valuation Report." ValuAdder. "Business Valuation Software." U.S. Securities and Exchange commission. "Beginners' Guide to Financial Statements."