Smart business owners never fly by the seat of their pants. They have business plans in place to ensure success, goals to help their business thrive and grow, and documents pertaining to business valuation. However, it can be hard to know how often to perform a business valuation. Business plans tend to be reviewed every few years, and goal setting is often done annually. What’s the rule of thumb, then, for how often to conduct a business valuation?
Well, it turns out that the answer to that question is, “It depends.”
At a minimum, you should do an annual valuation of your business. In May 2018, The Balance Small Business likened a business valuation to a resume that is kept updated. Why? Because life is unpredictable, and you might need that valuation. An opportunity to merge with another business might come along, for instance, and that valuation will be necessary as part of the due diligence for the transaction. The same goes for selling your business. And, of course, should something happen to you as a business owner, the valuation can help your company and/or family in case they have to dissolve the business.
Publicly held companies are required to do a business valuation in one form or another every quarter of their fiscal year as part of Securities and Exchange Commission (SEC) financial reporting regulations. In Aug. 2018, Forbes cited the transparency such reporting provides everyone, from investors to the average consumer. In short, it shows that a publicly traded company has nothing to hide.
You as a small business owner, however, are not required to report financial information quarterly. Nonetheless, are there times when you might want to do a business valuation every three months? The answer is yes.
One reason might be if your business is strongly seasonal. Consider a swimming pool maintenance service. The summer and fall seasons should go like gangbusters. The rest of the year, though, might get dicey from a financial perspective.
Turns out that’s a compelling reason to do more frequent business valuations. In Nov. 2018, Business News Daily suggested that seasonal businesses could improve their finances by diversifying. That could mean investing in an adjacent industry by purchasing or merging with another company. The article also suggested investing in businesses with longer seasons. In either case, those more frequent business valuations would make purchase and merger transactions easier and more effective.
Ad Hoc Valuation
There probably isn’t a good reason to do a business valuation more than quarterly. Such an approach would become onerous for almost any small business — at least one without a dedicated accounting staff. However, are there times when you should do an ad hoc valuation of your business?
One case for ad hoc valuations is a business partnership situation. Partners come and go for a variety of reasons, as Inc.com stated, and as such, it’s important to know what your business is worth so you can determine what is fair in buying out your partner(s). Thus, if you get an inkling that a partner might soon be heading for the door, it’s a good idea to conduct an ad hoc valuation.
Another time is if you are considering an IPO. There are a lot of moving parts vis-a-vis an IPO according to the Corporate Finance Institute, but valuing your business is key to determining what your opening stock price will be.
When it comes to business valuation, it’s important to remember that you are not alone. DCA CPAs have a wealth of experience in determining how — and how often — to value your business. Visit https://donohoocpa.com/contact/ to schedule an appointment to discuss your business valuation.