Business Valuation: You Know What Your Business Earns. Do You Know What It's Worth?
In her first blog for Journey Consulting, Cam Vander Zanden, CPA, ABV, draws on more than a decade of experience in accounting, financial analysis, and business valuation to explore why knowing what your business is worth matters long before you're ready to sell.
You probably know how much revenue your business generates. You know whether you're profitable, what your expenses look like, and hopefully, how much cash you have available.
But if someone asked what your business was worth today, could you give them a confident answer?
And if you have a number in mind, what is it based on?
Earlier in my career, while working in public accounting, I worked with a software business owner who wanted to transition ownership to his daughter and another key employee. He had a number in mind for what the business was worth. When the valuation came back substantially lower than expected, I remember how confused and disheartened he seemed.
His daughter was capable, but he was still the face of the company and deeply involved in its technical operations. Someone would need to take over those responsibilities for the business to operate successfully without him.
What stayed with me wasn't just his disappointment.
It was realizing there were opportunities to address the issues affecting his business's value, but he needed time and a plan to do something about them.
That's why I believe understanding your business's value matters long before you're ready to sell.
What Is a Business Valuation?
A business valuation is an informed estimate of what a business is worth at a particular point in time, for a specific purpose.
Sounds straightforward, right? But determining that value involves more than looking at revenue or the bottom line.
A valuation considers financial performance, assets, cash flow, future earnings, industry conditions, and risks. It also considers factors that don't appear on a financial statement, such as management strength, customer relationships, operational systems and processes, and culture.
Consider two businesses generating similar profits. One relies on its owner to manage operations and customer relationships. The other has an established leadership team, diversified customers, and documented processes.
Although their earnings look similar, their values may be very different.
Why? Because a potential buyer wants to know whether the business can continue generating those earnings in the future, especially without the current owner.
As Journey's founder Jayne McQuillan explains in The Value Journey, business value is influenced by risk, growth, and the capital investment required to support that growth.
A valuation is not a guaranteed selling price. What a buyer pays depends on market conditions, negotiations, and what that buyer sees as valuable.
Why Would You Need a Business Valuation?
Selling is an obvious reason, but it's far from the only one.
Making better business decisions. A valuation establishes a baseline, helping you evaluate whether your decisions are building long-term value.
Planning for retirement or succession. If much of your personal wealth is tied to your business, understanding its value helps you evaluate your financial goals and plan for transferring ownership.
Ask yourself: Is your business worth what you need it to be to support your retirement or future plans?
Buying, selling, or transferring ownership. For partnerships, shareholder buyouts, or family transfers, a valuation establishes a starting point for those conversations.
Addressing legal or financial requirements. Certain estate and gift tax situations, ownership disputes, and other legal matters require a formal valuation. The purpose determines how the valuation must be prepared and documented.
Not Every Business Valuation Serves the Same Purpose
The type of valuation depends on its purpose.
A calculation of value may be appropriate for growth or transition planning.
An ownership dispute or tax-related transaction, on the other hand, may require a formal, independently prepared valuation.
Choosing the Right Valuation Professional
Next, find someone qualified to perform the valuation you need.
When selecting a professional, look for recognized valuation credentials, such as:
CVA (Certified Valuation Analyst): Issued by the National Association of Certified Valuators and Analysts (NACVA).
ABV (Accredited in Business Valuation): Issued by the American Institute of CPAs (AICPA).
ASA (Accredited Senior Appraiser): Issued by the American Society of Appraisers, with a specialization in business valuation.
Ask about their experience valuing businesses similar to yours. Make sure they understand why you need the valuation and whether their work will meet the requirements of its intended use.
A qualified professional should explain their approach in terms you understand, including what information they'll need and what you'll receive when the engagement is complete.
Knowing Your Value Is Only the First Step
I still think about that software business owner and what might have been possible with more time and a plan.
I wish I'd been in a position to help him document internal processes, identify someone to take over his technical responsibilities, and establish a longer timeline to transition those duties. Those steps would have addressed risks affecting his company's value and helped prepare the business for its next owners.
It's an example of why I believe a valuation should be the beginning of a conversation, not the end of one.
As you review this year's financial performance and plan for 2027, ask yourself:
If you knew what your business was worth today, what might you do differently in the coming year?
Understanding your value now gives you a starting point for setting priorities, making decisions, and focusing on the areas that could strengthen your business over time.
Whether you're considering a sale, preparing for the next generation, or simply focused on growing the business you've built, the sooner you understand its value, the more time you have to influence what comes next.
Start the New Year Knowing Your Business Value
As you plan for the year ahead, don't rely on assumptions about what your business is worth. Journey's Calculation of Value can help establish a baseline so you can make more informed decisions about growth, succession, and your long-term goals.
Business Valuations: Common Questions
What information do I need to prepare for a business valuation?
A valuation professional will typically request several years of financial statements, tax returns, and information about your company's operations. They may also ask about ownership structure, major customers, outstanding debt, key employees, and future growth expectations. Having accurate, organized financial records can help make the process more efficient.
How long does a business valuation take?
The timeline depends on the size and complexity of your business, the type of valuation being performed, and how readily the necessary information is available. A preliminary calculation of value may take less time than a comprehensive formal valuation. Ask your valuation professional about the expected timeline and information requirements before beginning.
How often should a business owner revisit their company's value?
There isn't a single schedule that works for every business. Some owners review their value annually as part of strategic planning, while others update it after significant changes in profitability, ownership, operations, or market conditions. Regular reviews can help you track whether your business is moving toward your longer-term financial goals.
Can I increase my business's value before selling it?
Potentially, yes. Depending on the business, improvements in profitability, customer diversification, management depth, financial reporting, and operational systems may positively influence value. However, not every improvement will have the same impact. Understanding the factors currently affecting your business's value can help you prioritize where to focus your efforts.
Is the end of the year a good time to determine my business's value?
Year-end can be a useful time to begin the process because you're already reviewing financial performance and establishing goals for the coming year. A calculation of value can provide a baseline for evaluating priorities and tracking progress. The appropriate valuation date and timing will depend on your purpose and the availability of reliable financial information.
Cam Vander Zanden, CPA, ABV, Senior Financial Analyst & Value Advisor, brings more than a decade of experience in accounting, financial analysis, and business valuation. Helping business owners identify opportunities for improvement, understand what drives their company's value, and make informed decisions about their future. Journey Consulting is focused on providing business owners and their businesses with strategic planning, exit planning, financial expertise, and organizational improvement. We use a holistic approach within all of our services by aligning leadership with business strategy and outcomes.
