Top 5 Reasons to Hire Business Valuation Experts

Knowing the true value of your business is the first step in preparing for its next big move. Some may view business valuation exercises as routing number-crunching needed for funding rounds and investor exits. However, it can offer far greater value.

A professionally prepared business valuation report establishes a price point in share transactions and uncovers vital insights about your company’s strengths and growth opportunities. The benefits of an accurate business valuation can be felt right from securing funding to planning equity compensation and planning for acquisitions.

In this article, we will explore five key reasons why hiring the services of a business valuation expert can be a game changer for your business. Read on to know more!

5 reasons to consider valuation experts

Hiring experts can bring substantial advantages for business owners and stakeholders. Some of the reasons why anyone involved in private equity would consult experts are as follows:

Funding rounds

Once you have caught the attention of investors in a funding round, the main topic of contention that you must resolve is the business valuation. If you cannot find it, you could offer complex securities like convertible preference shares, multi-class shares, and non-dilutable shares. 

You may know your startup like the back of your hand but you may not know the economy and the industry that well. Since these are important inputs, you will need to conduct extensive research. This would involve compiling economic outlooks published by various agencies, banks, and government bodies. You will also need to get an unbiased opinion from an industry expert on the outlook of the industry.

Additionally, you will need financial acumen and familiarity with methodologies to put forward an accurate and defensible business valuation.Since it is challenging to handle these responsibilities, most startups look to experts to provide credible  reports and bring all investors on the same page.

Tax compliance

When a company issues equity compensation, it must establish its fair market value (FMV). You cannot afford any mistakes in calculating the FMV. You must establish the FMV with a 409A valuation that adheres to all guidelines and requirements stated in Section 409A of the Internal Revenue Code (IRC).

Given how difficult it is to interpret tax codes and revenue rulings, most companies prefer relying on experts for 409A valuations. Another reason for companies to prefer experts is the safe harbor provisions.

Of the three approaches, two can be used by company insiders. The illiquid startup method, the first of the two, requires complex financial forecasting. The assumptions involved can be subjective, and hence, easy targets for IRS challenges.

The second method, the binding formula method, places considerable limitations on how it  can be set during any third-party share sales and funding rounds.

The third method, the independent appraiser method, is chosen by many startups by the process of elimination.

Executing fruitful exits

Due to the lack of liquidity, private equity investors must be agile when exit opportunities present themselves. You must be able to evaluate if a deal is fair instantly. This is simple if you have been actively involved in the day-to-day operations of the company. If you are constantly in touch with the founders, executives, and key employees, you will know the company’s strategic priorities, the challenges it is facing, and its overall financial and operational health.

In some cases, you may not need to ask for reports to understand current projects, revenue drivers, and potential risks. However, this is not the reality. In a short period of time, when exit opportunities present themselves, investors must review the financial history, intellectual property assets, R&D progress as well as external factors like regulatory environment and industry outlook to get an idea about the company’s fair business valuation.

This can be a daunting task for someone who is otherwise occupied or lacks expertise in valuation methodologies. Without a credible analysis, you would be going into a negotiation blind. Hence, investors making an exit typically rely on business valuation experts to ensure that they receive the right price. 

At Eqvista, we have recognized this need and offer an affordable portfolio to support investor decision-making.

Resolving conflicts

Hiring business valuation experts helps attain an objective assessment that aids in resolving conflicts related to equity value. If private equity is one of the assets in someone’s estate or the portfolio of one of the spouses, value-related conflicts might arise in divorce settlements and inheritance distributions as well.

At the core of all these conflicts is a disagreement regarding the business valuation. Whenever one party puts forward a valuation, chances are that the other party will not see it as credible.Such impasses can get drawn out for years without the intervention of a third party. 

A confrontational way to get a third party involved and resolve the issue would be hiring lawyers and filing lawsuits. Instead of each party hiring a different valuation expert, it would be better for all parties to come together and hire the services of one single expert. Since the expert does not represent any single party, they can act independently and provide a credible report.

Internal benchmarking and performance tracking

Business valuation experts can help founders and investors track the performance of their startups. To start with, experts can review the performance of your startup to form baseline values for your revenue streams. 

Getting regular business valuations from an independent expert can help you track your company’s growth and identify key trends in performance. Another area where experts can help is patent valuation. If you’re a tech startup, you must know the value of your research and the intellectual property it generates. When your intellectual property draws the attention of large corporations, you can enter the negotiations for acquisitions or acquisition of intellectual property with the right price in mind.

These reports are filled with valuable insights into a company’s areas for improvement and readily exploitable opportunities. You can use these insights to form a concrete strategy for growth.

Eqvista – Empowering smart decisions with accurate valuations!

The services of a business valuation expert can prove handy in funding rounds, tax compliance, executing exits, resolving conflicts, and internal benchmarking and performance tracking. You can add weight to your valuation and ask if credible analysts back it. Getting a 409A valuation from an independent appraiser is the most convenient way to issue equity compensation in a tax-compliant manner.

Since startups may need multiple 409A valuations in a single year, Eqvista offers affordable annual subscription plans for unlimited 409A valuation services starting at $990.

If you are offered an exit from a private company that you have not actively managed, experts can provide an agile and accurate report so you can enter negotiations knowing the fair price.

The opinion of an independent expert can serve as an effective tie-breaker in conflicts related to the value of equity.

Another reason why startups may approach business valuation experts is the reports that contain unbiased assessments of performance metrics and highlight areas for improvement.

If you need a credible valuation for any of these critical reasons, look no further than Eqvista. Our team of NACVA-certified analysts has provided accurate valuation for over 19,000 companies. Contact us to learn more!