Why You Should Value Your Private Company?

1. Fundraising and Attracting Investors

When raising capital, investors must know what a company is worth. An accurate valuation ensures that company owners raise the appropriate funds without giving away excessive equity, and investors receive a fair ownership aligned with the company’s potential.

The equity raising process can many times be stressful for business owners, especially for those who need the additional capital to continue normal operations. Therefore, having an efficient valuation process will save time, money, and emotional strain for the company and its management.

On the other hand, investors are interested in finding the right valuation they are willing to write a check. In our experience, investors appreciate having a well-supported valuation report that backs the valuation of the company, creating more comfort in the investment opportunity.

2. Mergers and Acquisitions (M&A)

The company transaction world is highly dependent on the company valuation. Similar to equity raising, M&A transactions rely heavily on finding the company’s valuation, which the buyer and the seller are both willing to transact.

On the seller’s side, business owners usually don’t have a defined and defensible valuation number for their business, and many times end up trusting the buyer for a valuation. As we’ve seen in the marketplace, this thought process might leave some money on the table for sellers and might create issues post-closing. A well-performed valuation report will provide business owners with a quantitative analysis based on market data that derives a starting point for negotiations while keeping expectations in check.

On the buyer’s side, the goal of an M&A transaction is almost always to maximize the potential returns in the future by taking control of the target business. Performing a third-party valuation will help buyers double-check their valuation assumptions, financial modelling calculations, and have an independent valuation performed to show sellers that they don’t want to take advantage of them in the transaction.

3. Exit Planning

Retiring owners find themselves with the decision whether they would like to sell their company, pass it along to their children, or some type of internal transaction with key employees, like a management buyout

Business valuations are important for business owners when deciding whether they would like to gift a portion of their ownership to a family trust or to a charity. At OneTriad, we work alongside financial advisors, accountants, and attorneys to design the most suitable exit plan for business owners.

For example, in the exit planning world, our valuation reports come in handy for financial advisors and estate planning attorneys when analyzing pre-exit strategies. Additionally, these reports can be easily converted to qualified appraisals by our in-house team of certified professionals for tax reporting purposes.

4. Employee Ownership and Compensation

Employee stock plans, incentive units, phantom stock, or options are some examples of employee equity compensation that many businesses use to retain key employees, better align the management team with the shareholders’ interests, and incentivize performance by giving employees participation in the company’s performance.

An important requirement for equity-based compensation is the 409A valuation regulations under the IRS code. This section of the tax code establishes that a fair market valuation of the company’s common stock or equity compensation is needed to ensure compliance with IRS regulations when issuing employee stock options. Without this fair market valuation, there is a significant risk of tax penalties for both the company and employees if options are granted below fair value. A defensible, third-party valuation not only protects against these risks but also provides transparency and improves employees’ financial visibility.

5. Loan Underwriting

Banks, private equity firms, and strategic partners typically require a valuation before committing financial resources. These parties must accurately assess the company’s financial strength, risk profile, and collateral value before extending credit. They want to understand the cash flow generating ability of the company to repay its debt commitments and therefore, reduce default risk and delinquencies.

The role of a business valuation from a lender’s perspective is essential for their underwriting process, protecting both the lender and the borrower’s long-term viability. Some lenders, such as banks, are also subject to strict lending regulations. Independent third-party valuations help them demonstrate prudent underwriting standards and justify lending decisions to regulators and auditors.