There are a number of reasons why your business may require a professional valuation, of the business itself or of its assets. It is important to be familiar with these main scenarios so that if you find yourself in, or soon to be in, such a position you can be prepared.
In some cases, if you fail to obtain a proper valuation at the right time, you can cause yourself a real headache down the line.
For example, if your company is audited and you have a significant change in an asset’s use (i.e. you go from using a warehouse in the business to renting it out to third parties) and you do not have a valuation conducted at the time of the change of use you could have a potential impact on your next audit report.
But this doesn’t just apply to large audited companies, there are times when all businesses will need a valuation. We have covered the main scenarios here;
1. Financing Requirement.
A bank or other lender may require an up-to-date valuation as part of a funding application, or once funding is granted it may form part of the terms and conditions of the agreement that you have to submit regular appraisals. It is important to check your terms carefully and fully understand the level of initial and ongoing assurance that the lender is looking for, as some will require full third-party valuations, others may rely on an auditor report, and some may require nothing at all.
2. Investor Requirement
Similarly to the above your shareholders or other investors may seek initial or ongoing formal valuations to have comfort over their investment. Full business valuations can be costly so investors may be satisfied relying on audited financial statements if these are already required.
3. Insurance Requirement
Either as part of taking out insurance or in the unfortunate event of needing to use the insurance policy you will likely require an asset or machinery valuation but you would not require a full business valuation.
4. Dispute Resolution
Disputes or conflicts arise in any way with the owners. It can be a dispute between owners of the business, or potentially even a divorce situation with one of the business owners. When this happens, it is worth considering if it is time to secure an up-to-date business valuation, or at least a valuation of key assets.
If there could be any form of legal action taken against or by a business owner, it is worth stopping and thinking if the business itself or the assets may need most recent value as part of these actual or potential proceedings.
For example, if a spouse is seeking a divorce and they may have a right to a share of the business, an up-to-date valuation can help discussions. Another example of the owner taking legal action is if the owner is making a claim that the business has suffered as a result of an action by another and they are seeking legal remedy it could be helpful to have a valuation of the business ready for these negotiations.
This list is by no means exhaustive, and you should keep up to date with your local business compliance and taxation rules to ensure that you remain prepared and alert for potential valuation needs.