Business Valuation Blog | Understanding Buying / Selling a Company

If you own a small business, knowing what your company is worth isn’t just about preparing for a sale or attracting investors. It is also a powerful tool for internal planning and strategic decision-making. Business valuation provides insights that go far beyond a price tag, helping leadership make informed choices about growth, resource allocation, succession, and performance tracking.

Many businesses overlook valuation as a strategic planning tool. Understanding the value of your company helps you clarify financial health, shedding light on your company’s assets, liabilities, revenue streams, and risks. It can also assist in setting measurable goals by establishing a benchmark value, which allows you to track the impact of strategic initiatives over time.

Other internal uses for an updated business valuation include support for budgeting and forecasting, evaluating existing investments and potential expansion, succession planning, and ownership changes.

Different valuation approaches may be used depending on the nature of your business and the information available. Credentialed, experienced business appraisers will consider the three approaches to value (Market, Income, and Net Asset) while relying on those that make the most sense for your specific company. For example, the income approach may be a better method if you’re looking at future profitability, risk, and growth potential, all core factors in long-term strategic planning.

Integrating an appraisal into your regular business cycle helps you identify value drivers and detractors, monitor financial trends, adjust strategies proactively, and increase organizational alignment with long-term goals.

Consider a formal appraisal update when you’re holding strategic planning sessions or considering major changes in management or ownership. In addition, during periods of significant growth or after downturns, during a merger, or while prepping for financing and debt restructuring.

Business valuation can be a strategic mirror for internal reflection. When engaging regularly with a seasoned professional appraiser enables smarter planning, sharper fiscal management, and more resilient growth strategies.

When most people think of business appraisers, they envision a formal valuation report delivered for a specific need, whether for purchase and sale, divorce settlement, litigation support, or estate planning. However, the role of a valuation professional doesn't have to end when the report is submitted. In fact, engaging your appraiser as a post-report consultant can provide ongoing value that helps you act strategically on the valuation findings.

A valuation report is more than a number; it's a diagnostic tool that contains insights into your company's financial health, risk profile, industry standing, and operational efficiency. Business owners and stakeholders often find that they need help interpreting those insights and translating them into actionable strategies. This is where the appraiser steps in as a consultant.

Suppose your transaction continues to develop after the appraisal report is delivered. In that case, additional insights pertinent to the valuation and its role in ultimately closing a deal can be had through post-report consulting. For example, the appraiser can assist during negotiations and provide clarity on valuation assumptions. This may include rebutting opposing appraisal estimates or explaining the rationale behind valuation multiples. By identifying value drivers and detractors in the report, appraisers can help management focus on improving key metrics to enhance future valuations.

If a valuation becomes the center of a legal dispute, the appraiser can serve as a neutral expert or advisor, supporting attorneys and their clients with context and clarity. Business appraisers may also assist in interpreting their valuation in the context of family transitions, gifting, or employee ownership plans.

A valuation is a snapshot in time. Business owners who treat it as the end of the process may miss out on the deeper benefits of working with a professional who already understands their company. Post-report consulting transforms the valuation from a static document into a dynamic tool for growth, governance, and decision-making.

Business appraisers are more than number crunchers; they are strategic advisors. When you bring them in after the valuation report is complete, you gain a partner who can help unlock, preserve, and grow the value of your business over time.

Historical financial performance plays a key role in appraising small businesses; however, not all years are created equal. Economic cycles, management changes, and external shocks can skew one year's numbers compared to others. That is where weighted average valuation comes in; a method that applies varying importance (or "weights") to different years to better reflect the company's true worth.

Weighting is a technique that assigns more importance to certain years over others when calculating average performance metrics, such as gross revenue, EBITDA, or net income. This is often necessary due to the possibility that recent performance is more relevant to current and future expectations. In addition, outlier years due to economic downturns or windfall profits may distort the average. This has become even more prevalent since COVID-19, as both 2020 and 2021 results for many companies may be skewed dramatically in different directions.

The weighting of prior years is somewhat subjective, and the appraiser should rely on their experience and expertise while making common-sense decisions as to how to apply this methodology.

One option is to equally weigh the prior 3+/- years of performance if the company shows a steady level of revenue and net income. This is fairly straightforward but can mask more recent trends and future growth forecasts in the company.

Incremental weighting may be more appropriate in certain instances with recent years given progressively more weight. This drives the emphasis of current performance without completely neglecting older operational periods.

In some cases, especially with newer businesses just getting a foothold, the appraiser may rely 100% on the most recent income and balance sheets as they represent the first full period of operation with everything running in full swing.

The volatility of the market or industry may play a part in this decision as well. If performance in a given industry is overly cyclical, relying on a broader period may smooth out the revenue swings. In contrast, companies showing steady growth year over year may determine a need to rely on more recent performance only.

In conclusion, the weighting of historic financials is an important component of business valuation and can provide a more balanced picture of a company's performance. Whether buying, selling, or just looking at internal strategic planning, speak with your certified valuation professional to discuss this in more detail when engaging in an updated appraisal.

In the world of valuation, clear and accurate communication is essential. Two concepts that often create confusion, especially among clients and newer appraisers, are extraordinary assumptions and hypothetical conditions. While they may sound similar, they serve very different purposes in an appraisal report and can significantly affect how a value opinion is interpreted.

An extraordinary assumption is something the appraiser presumes to be true for the sake of the analysis, even though it may not be certain at the time of the appraisal. It is typically considered more common in its use and implies that while the assumption could be true, it hasn't yet been verified.

One example would be where a business is valued at a future date using forecasted data, which includes the assumption that significant investments will be made over the course of that future period. This assumption would be considered "extraordinary" because if it turns out to be false, it could significantly affect the value conclusion.

A hypothetical condition, on the other hand, assumes something that is known to be false as of a current or retrospective date but is taken as true for the purpose of the analysis.

This type of condition is essentially a "what-if" scenario. It is used when the appraiser is tasked with analyzing a situation that doesn't reflect the present reality of the business, such as a hypothetical change to the balance sheet or income statement, to show how the company may be more profitable under a restructured condition.

Both extraordinary assumptions and hypothetical conditions are recognized under the Uniform Standards of Professional Appraisal Practice (USPAP) and must be clearly disclosed in the report.

Using them incorrectly can lead to misleading or non-credible appraisal results. More importantly, readers of the report, such as business owners, lenders, investors, or courts, need to understand whether the value opinion depends on something that is uncertain (extraordinary assumption) or flat-out not true (hypothetical condition).

Understanding the difference between these two concepts ensures the credibility, clarity, and compliance of an appraisal report. When used properly, extraordinary assumptions and hypothetical conditions allow appraisers to address real-world complexities with professional rigor.

As a business appraiser, your primary role is to provide accurate, supportable, unbiased valuations. But in today's competitive landscape, delivering high-quality work is not enough. To grow your practice and stay relevant, it is essential to build relationships with professionals whose clients regularly need valuation services, such as financial planners, accountants, attorneys, and business brokers.

The fact is that valuation work complements the role these third parties have with small business owners. They play a critical role in guiding their clients through significant business and financial decisions. At certain points, they will need a trusted valuation expert to support their work.

For example, financial advisors may require business valuations for succession planning, retirement strategies, or wealth transfer. Accountants often need independent valuation work for tax reporting, buy-sell agreements, or compliance-related matters. Attorneys rely on valuations in divorce proceedings, shareholder disputes, estate planning, and litigation support. Business brokers require accurate valuations to set listing prices and help both buyers and sellers negotiate fairly.

When these professionals require appraisal work for their clients, having a go-to expert like you adds value to their service and positions you as an indispensable partner. Working together with a mutual client builds credibility and trust. Over time, you will learn each other's working styles, communication preferences, and areas of expertise. Over time, by delivering accurate, well-documented valuations, they will be comfortable referring you to other business owners in the future.

Building these types of relationships will allow you to grow your valuation practice more efficiently by networking with a single contact for multiple engagements over time. Your client base says a lot about you. Being well-connected with respected professionals elevates your standing in the business community and valuation industry.

In summary, business valuation is a specialized field, but it doesn't operate in a vacuum. Proactively developing relationships with other small business consultants allows you to expand your reach while elevating the quality and value of your service. It's a win-win for everyone involved, especially the client.

When business partners decide to part ways, a fair and accurate valuation of the company is a critical step in the process. Whether a partner is retiring, moving on to another venture, or selling their stake for any other reason, determining the current value of your small business provides a high likelihood of a smooth transition while minimizing the chance for a dispute.

An independent, unbiased appraisal ensures that the partner leaving the company is compensated fairly based on their stake in the business. Without a professional third-party valuation, either the departing or remaining partners may end up at a financial disadvantage, leading to conflicts that could quickly turn into a legal battle.

When partners disagree on the value of the business, this dispute will delay or even derail the buyout process. An objective appraisal from an outside professional mitigates these risks by providing a transparent, supportable analysis along with a narrative report presentation that all parties can agree upon.

If the buyout requires financing, lenders and investors will often require an accurate business valuation before approving any funds. A certified valuation strengthens the case for securing loans or attracting new investors to support the transition.

Business buyouts have significant tax and legal implications. The appraisal will assist in providing compliance with these regulations and avoid legal issues that could arise from improper financial disclosures. The business’s financial health is also at stake should a buyout not go smoothly. By engaging with a qualified and experienced appraiser, the remaining partners can maintain stability and continue operations without financial strain or uncertainty.

A documented valuation will set a precedent for ongoing business activity while providing a reference point and reducing ambiguity for future transactions within the business.

In summary, if you or your partner are considering leaving the company, one of the first steps in the process should be obtaining an independent business valuation. Engaging with a credentialed appraiser will greatly assist with ensuring fairness, preventing disputes, and maintaining business continuity. Seeking professional valuation services can safeguard all parties involved and provide a clear path for a successful transition.

When a small business owner passes away, their estate will most likely include the company and its underlying assets. Accurately valuing this business is essential for a smooth estate settlement and ensure a fair process that will minimize potential disputes, while also complying with legal and tax obligations.

For estates with multiple heirs, determining the market value of a business ensures that assets are divided fairly. Without an independent valuation, disagreements may arise over how to split ownership or distribute the inherited assets in a balanced fashion.

Estate taxes can be a significant concern, creating a need for tax planning strategies that minimize beneficiaries' liabilities. A business valuation completed by a credentialed, experienced professional will help determine the taxable value of an estate and ensure compliance with IRS regulations.

Heirs may choose to sell or continue operating the business. An appraisal will provide a realistic picture of the company's worth, guiding informed decisions about buyouts, sales, or ownership transfers. It also prevents underpricing or overestimating the business's value, which could lead to financial losses.

A business valuation can help prevent or resolve conflicts among heirs, partners, or stakeholders. Without an objective assessment, disagreements may escalate, leading to costly legal battles that can drain estate resources and delay settlements.

For businesses with multiple owners, a valuation is crucial for executing buy-sell agreements and succession plans. Knowing the business's worth ensures a smooth transition and avoids operational disruption.

Courts, probate proceedings, and the IRS often require a formal business valuation as part of estate administration. A properly documented valuation supports legal compliance and helps avoid penalties or disputes with tax authorities.

In summary, engaging with an independent business appraiser to conduct a formal valuation is a fundamental step in estate settlement that affects heirs, partners, and the future of the business itself. The report will be of great assistance in ensuring accuracy, fairness, and compliance, ultimately easing the transition for all parties involved.

In many divorce cases, a business is one of the most significant marital assets. Whether it's a family-owned enterprise, a professional practice, or a sole proprietorship, its value must be determined to facilitate asset division. The valuation outcome can affect property settlements, spousal support, and overall financial planning post-divorce.

Factors Influencing Business Valuation in Divorce

Courts and financial experts consider various factors when determining a business's value, including: Ownership structure: Whether the business is solely or jointly owned can impact its classification as marital or separate property.

Level of involvement: A spouse's active role in business operations can influence their financial entitlement.

Market conditions: Economic factors and industry trends may affect business value.

Goodwill and intangible assets: Personal vs. enterprise goodwill is often debated in divorce proceedings.

Tax implications: The sale or transfer of business ownership may trigger tax liabilities.

Common Challenges in Business Valuation for Divorce

Hidden assets or income: One spouse may attempt to undervalue the business or hide income.

Disputes over valuation method: Each spouse may prefer a method that benefits their financial interests.

Liquidity concerns: Even if a business has a high value, dividing it can be challenging if liquidity is low.

The Role of Business Valuation Experts

Appraisers will utilize the same methodologies they would for any valuation including the market, income and asset approaches. If the business is ongoing then it’s likely the first two will be relied upon, however, if the company owns a significant amount of equipment and real estate then the tangible assets should be valued as well.

Engaging a qualified business valuation expert, such as a certified valuation analyst (CVA), is essential for ensuring an objective and accurate assessment. Their expertise can help navigate complex financial issues and provide court-admissible reports. Determining a business's value in a divorce requires careful analysis and professional guidance. Whether negotiating a settlement or preparing for litigation, understanding valuation principles can help protect financial interests and facilitate a fair resolution.

An uncertain economic climate has persisted since COVID-19 and will continue in 2025. For many small businesses, that means tightening their belts and scrutinizing every dollar spent. One area where many are looking to cut costs is discretionary expenses that, while beneficial, are not immediately critical to daily operations. Third-party independent appraisal work and related consulting services are one area of note. Are small businesses concerned about spending money on external third-party services? Should they view them as being more essential?

Small business owners are continuing to face higher costs and challenging economic times. For those who rely on federal funding or aid, there is even more uncertainty with the current administration’s recent actions. As a result, they are forced to prioritize spending on essentials only, such as payroll, rent, and inventory, while cutting back on marketing, business travel, and professional services, including appraisals.

This strategy will result in immediate cost savings. However, there may be longer-term complications to this approach, especially when valuation and consulting work becomes essential to making sound business decisions. Regardless, many business owners view this type of service as an expense that can be delayed and even eliminated in the short term.

When cash flow is tight, small businesses tend to focus on immediate needs rather than long-term financial planning. Some companies rely on internal estimates, online valuation tools, or informal assessments rather than paying for third-party independent professional appraisals and consulting.d

Despite these cost-cutting measures, valuations remain crucial and obligatory for businesses in certain scenarios, such as bank financing, attracting investors, tax and accounting requirements, estate planning, partnership disputes, divorce, and insurance coverage.

In summary, while economic pressures may push small businesses to cut back on discretionary expenses like appraisals, completely eliminating them can be a risky move. Business owners should carefully weigh short-term savings against potential long-term financial consequences. Strategic spending and engaging with the right consultants who can materially impact the value of your business can help owners navigate these challenging times while maintaining financial clarity.

Rollover as Business Startups (ROBS) is an innovative financing method that allows entrepreneurs to use their retirement funds to invest in or purchase a small business. A critical step in the process is determining the company's value. A certified appraisal will assist in ensuring the investment aligns with both IRS requirements and your financial goals.

Why Business Valuation Matters for ROBS

The IRS mandates that any business purchased or developed with retirement funds must be fairly valued. Overpaying could jeopardize the long-term viability of your retirement account, while undervaluing the business may lead to IRS scrutiny.

The certified business appraiser will utilize the same standards, approaches, and methodologies that they do for any valuation purpose, specifically the Market and Income Approaches. If the company has a short operational history, it may request that the owner reasonably forecast and develop future revenue and expense streams under the income approach. The Asset Approach might be utilized if there are significant assets involved with little income generation, however, it is likely more beneficial that the balance sheet be factored into the other two approaches.

While it is possible to conduct a basic valuation yourself or with your accountant, it is highly recommended to engage with a qualified appraiser professional that has credentials from organizations such as the NACVA or ASA. This ensures adherence to industry standards and provides a comprehensive report that satisfies both the IRS and financial institutions involved in the ROBS transaction.

As the business owner, ensure that you perform due diligence by preparing accurate financial records, establishing realistic income projections, and having detailed documentation in place to support the valuation effort.

>In summary, Rollover as Business Startups (ROBS) is a potentially tax-free way to invest in a small business. However, it may be held under strict scrutiny, so ensure the process is well documented and supportable. It can be a powerful investment strategy that avoids the need to acquire partners or bank financing, but the success of your venture hinges on sound decisions and careful planning. An independent, certified business valuation can facilitate the process and set the foundation for a smooth and compliant transaction.