Especially in today’s economic climate, it is common for a business owner to wonder, “How often should I re-value my business? “or “How long is a business valuation valid?” The short and sweet answer is once a year. The long and honest answer is it depends. First, the answer depends on the purpose of the valuation. It then depends on whether there have been major changes in the business, the industry, or the economy.
How often should I re-value my business, Part 1:
What is the purpose of the valuation?
If you simply want the knowledge for your own peace of mind, some suggest that you calculate your own basic valuation about once a year, and then bring in a professional analyst every couple of years for a more accurate, in-depth analysis.
If you expect to sell your business or require a valuation for any other business needs, a professional valuation ought to be calculated. For these purposes, a valuation is usually valid for up to a year from the valuation date, assuming the underlying considerations remain largely unchanged. (Which brings us to Part 2.)
How often should I re-value my business, Part 2:
Have there been changes in underlying considerations?
Business valuations, by nature, make calculations and assumptions about a business’s value based on the facts available at the time of the valuation. A sound business valuation is typically valid for as long as those assumptions remain valid. The validity of those assumptions — and thus, the validity of the valuation — can change when events unforeseen or previously unknown become “known or knowable.”
Some of these assumptions, like world events, can change rapidly; some, like economic trends, more slowly. Some assumptions are internal, like management and financing; some external, like industry competition.
To account for inevitable change in company performance, industry conditions, and economic climate, a valuation should be re-evaluated annually, but in today’s world, more often is likely necessary. If there have not been significant changes in contributing factors, re-valuing a business should be fairly straightforward, simply updating current financials. But, if there has been a notable event in the economy or change in the business, updating the valuation will require much greater analysis.
Want to know how much your business is worth? Request a custom valuation of your business for the most accurate picture of what your business would likely sell for, and how long it might take to complete the transaction.