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A Guide to Valuing a Private Business for Strategic Planning

  • Parkview Partners Capital Management
  • 5 days ago
  • 3 min read

Understanding the Purpose of Business Valuation


Valuing a private business is a foundational step in many strategic planning discussions. Unlike publicly traded companies, private businesses do not have readily observable market prices, making valuation a more nuanced and judgment-driven process.


Business valuation is commonly used to inform planning related to succession, ownership transfers, tax compliance, estate planning, and potential liquidity events. This guide provides an educational overview of key valuation concepts and methods.


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Why Business Valuation Matters


A current and well-supported valuation can provide clarity across multiple planning areas.


Common uses of business valuation include:


  • Ownership transition or succession planning

  • Estate and gift planning

  • Buy-sell agreement structuring

  • Strategic growth or recapitalization decisions

  • Divorce or shareholder dispute resolution


Understanding value helps owners make informed decisions aligned with long-term objectives.


Key Factors That Influence Business Value


Several qualitative and quantitative factors contribute to a private business’s value.


Financial Performance


Historical and projected financial results are central to valuation analysis. Key considerations often include:


  • Revenue growth trends

  • Profit margins

  • Cash flow consistency

  • Expense structure


Reliable, well-documented financial statements support more meaningful valuation outcomes.


Industry and Market Conditions


External factors such as industry trends, competitive landscape, and economic conditions can influence value. Businesses operating in stable or growing industries may be valued differently than those in highly cyclical or declining sectors.


Business Structure and Operations


Operational characteristics often reviewed include:


  • Customer concentration

  • Supplier dependence

  • Management depth

  • Scalability of operations


Operational risk and sustainability can materially affect valuation conclusions.


Ownership and Control


The degree of control associated with an ownership interest influences value. Minority interests may be subject to valuation discounts, while controlling interests may command premiums, depending on circumstances.


Desk with a model house, calculator, books, plants, pen, and paper, with text 'Three Valuation Methods'.


Common Business Valuation Approaches


Income Approach


The income approach estimates value based on the business’s ability to generate future economic benefits. This method often involves discounted cash flow (DCF) analysis, which converts projected cash flows into present value using a discount rate that reflects risk.


Market Approach


The market approach compares the subject business to similar companies that have been sold or valued recently. This method relies on valuation multiples derived from comparable transactions or guideline companies.


Asset-Based Approach


The asset-based approach focuses on the net value of a company’s assets minus liabilities. This method is more commonly applied to asset-intensive businesses or situations involving liquidation or holding companies.


Valuation Discounts and Premiums


Certain adjustments may be applied depending on the nature of the ownership interest being valued.


Common Adjustments


  • Lack of marketability discount: Reflects difficulty selling a private interest

  • Minority interest discount: Reflects lack of control over operations or distributions


The appropriateness of discounts depends on purpose, ownership structure, and applicable regulations.


Businessman's hands near a small locked black briefcase, representing control and marketability.


The Role of Professional Appraisals


Formal valuations prepared by qualified professionals may be required for certain planning purposes, such as estate and gift tax reporting. Independent appraisals help support valuation assumptions and documentation standards.


Professional valuation reports often include:


  • Detailed financial analysis

  • Methodology explanation

  • Assumptions and limitations

  • Supporting market data


Integrating Valuation Into Strategic Planning


Business valuation is most useful when incorporated into broader planning discussions.


Valuation insights may inform:


  • Timing of ownership transfers

  • Liquidity planning for taxes or buyouts

  • Alignment with retirement planning goals

  • Structuring of trusts or gifting strategies


Periodic updates help ensure valuation data remains relevant as conditions change.


Conclusion


Valuing a private business is a complex process that plays a critical role in strategic, tax, and succession planning. By understanding valuation methods, influencing factors, and common adjustments, business owners can engage more effectively in planning conversations.


Because valuation outcomes depend on assumptions and professional judgment, qualified guidance is an important part of the process.



Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd and Parkview Partners Capital Management are separate entities. Neither Stratos nor Parkview Partners Capital Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. Investing involves risk, including possible loss of principal. The information presented is for educational purposes only and should not be interpreted as individualized investment, tax, or legal advice. Past performance is not indicative of future results. For more information, please review our Form ADV, available upon request.


 
 
 

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Financial Advisor, Investment Advisor, High Net Worth, Wealth Management, Tax Planning, Risk Management, Financial Coordination, Retirement Planning, Charitable Giving, Columbus Ohio, Parkview Partners Capital Management

291 East Livingston Ave.
Columbus, OH 43215


Phone: (614) 427-2132

Fax: (614) 427-2132

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