If you’re a business owner thinking about selling, transitioning, gifting shares, or planning ahead, one question inevitably comes up:
What is my business actually worth and how precise does that number need to be?
It’s a simple question, but the answer depends entirely on what you are trying to accomplish. Whether you’re years away from an exit or already having conversations with buyers, understanding the type of valuation you need is just as important as the number itself.
In most cases, this comes down to choosing between two approaches:
- A Calculation of Value, or
- A Formal Valuation
Both can give you a sense of what your business is worth. But they are designed for very different situations, and using the wrong one at the wrong time may lead to poor decisions, unrealistic expectations, and potentially even lost value.
Starting Point: What Decision Are You Trying to Make?
Before diving into definitions, it’s worth stepping back and asking a more important question:
Why do you need a valuation right now?
If you’re early in the process — exploring options, thinking about exit timing, or just trying to get a basic idea of the business value today — a highly detailed, formal valuation may not be necessary. On the other hand, if you’re preparing for a sale, a gift, a transaction, or a tax event, a more rigorous and defensible approach becomes essential.
At a high level, the difference looks like this:
- A Calculation of Value is more practical, directional and limited in scope
- A Formal Valuation is more precise, comprehensive, and defensible.
Both the formal valuation and the calculation of value will require detailed financial and other in-depth information about the company, its operations, the economic environment, etc. Many times, the earnings and other financials will have to be adjusted and normalized to provide a clearer picture of the company’s performance (the due diligence to verify the information will vary with the type of valuation chosen).
What does a Calculation of Value include?
- Financial Analysis
- Historical & normalized financials
- Cash flow modeling
- Working capital requirements
- Market-Based Inputs
- Comparable transactions
- Industry-specific multiples
- Risk Adjustments
- Customer concentration
- Key-person dependency
When is a Calculation of Value Appropriate?
- You are 3–5 years from an exit
- You want to know:
- “What is my business roughly worth today?”
- “How much do I need to improve before selling at a price I need/want?”
- “What is my baseline for evaluating progress toward my growth goals?”
- You are comparing:
- An internal transfer vs. a third-party sale
- Timing decisions (sell now vs later)
What is a Formal Valuation?
A Formal Valuation is a much more in-depth, fully documented analysis designed to hold up under scrutiny (IRS, Legal, DOL, etc.). A Formal Valuation is a more rigorous financial analysis than a Calculation of Value and uses various valuation methodologies and approaches in arriving at a valuation conclusion. Additionally, a formal valuation takes a more detailed look at the economics of the subject company’s industry, geographical area and the broader economy. Unlike a Calculation of Value, a Formal Valuation may apply valuation discounts for various size blocks of the company interests.
A Formal Valuation is not just about estimating value. It’s about supporting decisions that others will rely on.
What does a Formal Valuation include?
- Financial Analysis
- Historical & normalized financials
- Cash flow modeling
- Working capital requirements
- Market-Based Inputs
- Comparable transactions
- Industry-specific multiples
- Buyer demand dynamics
- Risk Adjustments
- Customer concentration
- Key-person dependency
- Industry trends
- Economic trends
- Valuation Discounts, if applicable (if less than a 100% interest in the company is being valued)
- Lack of Marketability
- Lack of Control
- Documentation & Defensibility
- Full methodology transparency
- Professional standards compliance
When is a Formal Valuation needed?
A Formal Valuation becomes essential when:
- You are preparing to sell in the immediate future
- You need legal support, tax support (gift or estate tax), or for DOL/ERISA purposes.
You wish to get the value of various size blocks of the company.
Choosing the Right Path Forward
A Calculation of Value is useful when you need direction.
A Formal Valuation is necessary when you need precision.
Scott D. LaValley, CFP®,CVA®, MSFS, ChFC, CLU
Managing Director – Financial Planning
Baldwin & Clarke Advisory Services, LLC