How frequently should you get a business valuation?

I’m going to start by saying that, in my experience, expert business valuation opinions typically are sought when it is thought a business might be offered for sale, or where there is a dispute arising out of any number of different circumstances. For example, some of the things that give rise to dispute-related notional business valuations are where a business or part of a business is expropriated, where there is an income tax dispute with a taxing authority, where there are claims for damages or loss of profit, and perhaps most frequently where disputes arise between business owners.

Now, in terms of what I’m about to say, let me first say I am going to be 73-years-old next month and do not own, run, or intend to build a business valuation practice. As a result, I hope business owners find my following views more credible than they otherwise might.

So here is my answer to your question in the context of business transition where there is no fact-specific dispute or other reason to commission an expert business valuation.

To me, at a high-level, business transition is one of two things: It’s either an arm’s length sale or it’s a transition where the owners work to pass their business onto the next generation both from the point of view of ownership and management. In the latter case, I believe a notional business valuation consistently prepared from year to year or every second or third year is properly thought of as a very valuable report card. In fact, not only do I think that periodic scheduled business valuation are a required part of anything thoughtful generational business transition plan, I think this to be particularly true in today’s uncertain economic and business environment.

I liken the expense related to business valuation fees to the fees people pay for having investment advisors manage their public market securities where the typical fee is between 75 and 200 basis points, and where the most valuable asset that most of those business owners have is the equity interest in their business.

In my experience, business owners typically don’t see a requirement or benefit in paying annual or biannual fees to learn about their business value in a way that might enhance it. However, they are quite prepared to pay financial management fees to people in circumstances where their financial market assets are likely less important to them. That makes little sense to me.

So my short version of my longer answer is that owners of privately held businesses should seek business valuation advice far more often than they actually do. Not just in the case of circumstances where they need to have the valuation done for a specific purpose but where they actually are having it done in order to help them manage and build the value of their business.