Business Valuation Blog | Understanding Buying / Selling a Company

How Business Valuation Helps when Adding Additional Shareholders

Posted by Business Valuation Specialists LLC on Jun 22, 2016 2:00:00 PM

Have you ever had someone ask about buying into your company but you don't know what the shares are really worth? Maybe you need to add equity for a serious expansion but aren't sure about how the valuation of a company will affect the share cost. You could be adding new partners who will help build your business but don't know what the share value will actually end up being. When you're adding additional shareholders to your business, you probably have a lot of questions about how much each share will be worth. A business appraisal helps you know your business' true value so you can pass that cost onto your new shareholders.

How Business Valuation Helps when Adding Additional Shareholders

  • Assures the existing shareholders of their shares' value. When you add shareholders to a company, your existing shares will be diluted as the new shareholders increase the number of shares in your company. That means your existing shareholders will want proof of the existing value of the business so they know they won't be losing money during the sale of new shares. As an example of this, having 100 shares in your company distribute among two partners means each partner has a half interest in the company. If you're adding two partners and 100 additional shares, suddenly each partner has a quarter share in the business instead.
  • Provides a basis for pricing new shares. If you're selling shares, you'll need to determine a price for the shares. How can you accomplish that if you're not sure of the value of your business? By having a company appraisal performed, you can determine the current value of your company before you try to price the shares.
  • Provides documentation for new shareholders. When you're adding shareholders, whether as a sale of shares to raise equity or providing a new partner with shares in lieu of cash payment, the shareholders will want documentation so they know what each share is worth. If you can't document the value, how would the new shareholder know that the share is worth the paper it's printed on?
  • Ensures you're not undervaluing or overvaluing your shares. Far too many businesses base their business value on a tax return or a balance sheet that may not reflect accurate business values. In tax accounting, assets are often depreciated by having their value distributed across a standardized depreciation table that spans a particular period of time. What if your equipment is worth more or less than its depreciated value at that time? At the same time, basing your business value on the sale price of similar businesses in your area may not reflect an accurate value either. A proper business appraisal will.

Adding additional shareholders to your company can be stressful, so don't make it any more stressful than it needs to be. By having a company valuation performed to determine the value of the shares, you have easy documentation for your shareholders both prior to and after the addition to verify the sale and cost of shares. If you haven't had business valuations performed on your company recently and need one done to add shareholders, it's important that you get that documentation.

Topics: business valuations, shareholder