• Expands the Investment Options-Privately-held firms, unlike publicly-traded counterparts, suffer from a lack of liquidity and the inability to use the company's shares as currency when seeking acquisitions or mergers. An annual valuation that clearly establishes a trend in value creation may enable the management of the company to use the shares as acquisition currency for another privately-held company. The annual valuation is also beneficial in the shareholders' investment decision making process with respect to maintaining the status of the company or seeking liquidity through a merger or sale of the company. The history of annual valuations may provide the shareholders with a foundation for negotiation of more favorable deal terms.

• Cost Benefit-Annual valuations may also provide the company with cost benefits as compared to one-off valuations performed every few years. Many valuation firms charge reduced fees for the annual update to a valuation as part of an ongoing valuation process for a privately-held business. For example, suppose that Triumvirate Industries, a privately-held company with $25 million in annual revenues, chooses to have a valuation performed once every five years. The valuation firm's fee is set at $20,000 per valuation. However, suppose that Triumvirate Industries has an annual valuation conducted. Whereas the initial valuation fee may be $20,000, the subsequent annual updates are $14,000. While the fee structure varies by firm and by project, annual valuation updates typically carry a lower cost than one-off valuations.

As can be seen from the previous discussion, there are a number of benefits associated with a privately-held firm instituting an annual valuation policy. While this is most typical with large, transgenerational enterprises, privately-held firms of all sizes may derive some benefit from annual valuations-whether it relates to financing purposes, estate planning, or the enlightenment of the owners in how they are creating value within their firm. Those firms that have been most successful in creating long-term shareholder value and transgenerational wealth have exhibited seven common characteristics, as previously discussed. Those firms that have instituted annual valuation policies have likely added value to the firm from one of the previous seven benefits. In the end, the best way of measuring the value that management has created for the shareholders of a privately-held business, particularly a transgenerational enterprise, is through annual valuations conducted by an independent valuation professional.

Copyright (c) 2007 Highland Global, LLC

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