There are many reasons to have a business valuation performed, including providing data necessary for buy-sell agreements, purchase and sale of a business, litigation support, insurance, estate planning and gifting, divorce, SBA loans, business planning, and gap analysis. And, of course, it’s a critical step in exit planning.
But how long is a business valuation valid? A general rule of thumb is about a year but it actually depends on many factors.
Business valuations are performed not only for a specific purpose but at a specific time. Although the valuation takes lots of data into consideration, the valuation is always of a certain date. But the final determination of value typically considers historical information as well as future projections about not only the property but its industry. Small fluctuations in valuation may occur, even on a daily basis, but with no significant modifications in terms of the business operations or capital structure, a valuation typically retains its validity for a year.
What factors could affect the valuation within a shorter time frame?
- Changes that materially impact revenue or earnings
- A change in control of the business
- A new management team
- Loss of key employees
- Legislation that materially impacts the industry
- A change in the purpose of the valuation
The impact that the purpose of the valuation has on the outcome is often overlooked by business owners. For example, a valuation that is needed for purposes of a divorce when the business is part of the marital estate will likely be very different than a valuation which is performed for purposes of a buy-sell agreement or for exit planning. And when legal matters are involved, jurisdiction plays a role in determining value. To avoid surprises, be sure that the purpose of the valuation is clearly defined.
I’d welcome the opportunity to assist you in the steps necessary to determine the current value of your company. It is a critical early step in the exit planning process. Knowing the value now and identifying the gap between current value and the value you need to exit on your terms is at the foundation of your exit strategy. Contact me for a complimentary discussion of your thoughts and questions on your eventual exit from your business.