{3 minutes to read}  Are you a business owner thinking of selling your business and wondering whether you need to have a formal business valuation done before you can sell the business? In this article, I'm going to suggest when you may need a formal valuation, and when you don't.

First, what do I mean by formal valuation? Just like there are real property appraisers out there, there are business valuation experts who are typically certified or licensed in some fashion and have many years of experience in the financial or business realm. 

When a business valuation expert is retained to prepare a valuation, it's a very in-depth review. The expert will review financial and operating statements, do interviews with key employees and management, look at the competition, and use a ton of data to prepare analyses. Business valuations are sometimes based on several different methods. 

As you can expect, or as you can imagine, a formal valuation is an expensive proposition. Even for a small business, a valuation done by an expert can cost between $8,000 and $20,000 and if the business is a lot larger, it's going to cost multiples of that. So, obviously, in a situation where your business is small, and you are selling, you may not want to have a formal business valuation done for the mere fact that it's going to cost a lot and take a lot of time.

What are the situations where you really will need a formal valuation? The first would be that the buyer requires it as part of their due diligence. Secondly, if you don't have a buyer identified yet, and you are listing your business either with a business broker or in some sort of marketplace, it's a good idea to have a formal valuation, so you can get the negotiations started on price. 

When do you not need a formal valuation? If you've already identified a buyer, there have been negotiations back and forth, and a price has already been determined that both sides are happy with, you don't need a valuation. If owners of a business are selling their interest to other owners, if it's a sale to a competitor who's familiar with your business in the market, or if the sale is to key employees and insiders, many times a formal valuation isn't required or even desired.

If you have any questions about selling a business, please contact us. A business sale is extremely complicated, and you're going to need assistance throughout the process. Contact information can be found on our website, www.taylorlegal.com. 

KATHERINE L. TAYLOR, ATTORNEY AND CPA

5850 Waterloo Rd

Suite 140

Columbia, MD21045

443-420-4075

443-420-4075 (fax)