Considered a part of the annual strategic planning process, business valuation is the process of determining the estimated market value of a business enterprise. It is a valuable tool for business owners, stockowners and investors. Business valuation is used for a variety of purposes such as buy/sell agreements, mergers and acquisitions, estate planning, bankruptcies and pension plans.

Business valuation is very important as it is regarded as the heart of a buy-sell agreement instituted between business owners. It is important not only for a business owner preparing for a sale, but also for numerous business and legal situations that need a detailed valuation. Business valuation is conducted while buying or selling shares to employees, planning gifts to heirs, retiring and selling to other family members, providing adequate key man insurance coverage and creating a basis for compensating key non-family management. There are several methods to determine the market value of an enterprise. Business valuation methods are categorized as market-based methods, income-based methods, asset-based methods and hybrid methods. One can select the method depending on the particular valuation need. Business valuation is conducted for the valuation for tax purposes and ownership transfer. Besides, it is necessary for financing or insurance purposes.

Business earnings, availability of assets, nature of the business, history of the enterprise from its inception, the enterprise’s goodwill and other intangible values, economic outlook in general, outlook of the specific industry, book value of the stock, and the financial condition of the business are some of the factors to be considered during a business valuation process. The cost of business valuation services varies significantly with the size and complexity of the business being evaluated. Other factors such as business cash flow, age of business, owner involvement, revenue, availability of vendor financing and profitability also determine the costs. In general, the cost of business valuation services range from a minimum of $1500 to thousands of dollars.

Business valuation services are heavily relied upon when it comes to legal proceedings, insurance settlements, contract issues, and many other everyday situations faced in the world of business. The thing is, with the economy in a bit of a bind this year, and looking to remain troubled or perhaps even worse for the foreseeable future, business valuations will be more and more likely to show the symptoms of difficult economic times.

In our current economic conditions and with the recession we’re facing worldwide this year, it’s clear that there will be a trickledown effect to nearly all business values. Think about it – as the mortgage crisis and other factors on Wall Street continue to wreak havoc on the stock market, the results gradually sweep throughout entire industries. Consumers are having a more difficult time purchasing goods and services from businesses; therefore, the businesses are also having a much more difficult time producing a healthy bottom line profit. For what it’s worth, it’s important to realize that business valuation services will most likely reflect lower values on average than they would have a year ago, for instance.

Because business valuation services are often used to take measure of certain assets held under a business umbrella, such as 401k accounts and pension funds, it’s also wise to expect valuations and appraisals to reflect the drastic downturn in the stock market when it comes to the securities a business holds. Depending on which indices are taken into account, the stock market has fallen into as much as a 20% plunge over the last couple of months. Business valuations are naturally going to reflect the bear market conditions.

Well, most economists predict that we are in for a bit of a struggle over the next year or two – there’s just not much hope for a really rapid economic recovery anytime soon. This means that there is a really valid question when it comes to using business valuation services to reflect a maximum possible value in their results – is it best to perform the valuations now, low as they might be, or to wait just a little while longer and hope for increased values? There is no definitive answer. It’s a question many are struggling with in today’s economic environment. The bottom line is that it is important to realize that business valuation services do reflect current financial and economic times in the analysis and data they provide – even if those results are less than desirable.