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Business Valuations

Business Valuations are performed for various reasons
  • Trying to Sell a Business
  • Looking to Buy a Business
  • Estate Purposes
  • Gifting
  • Divorce
  • Buyout of an Owner/Shareholder
  • Insurance Purposes

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A Business Valuation is an appraisal (someone's opinion) of the "fair market value" of the Business.

Business Valuations should contain an analysis of the risk elements of the business.

There are two valuation approaches to valuing a business.

Small Businesses should be "discounted".

A Business Valuation is an appraisal (someone's opinion) of the "fair market value" of the Business.

The "fair market value" concept identifies the estimated price a willing buyer would pay a willing seller for the interest in the business being appraised.

All relevant factors affecting the fair market value of the Business are considered, including:

  • The nature and history of the business.
  • The economic outlook.
  • The book value and financial condition of the business.
  • The earning capacity of the business.
  • Whether or not the business has goodwill or intangible value.

Business Valuations should contain an analysis of the risk elements of the business.

Market/Investment Risk
In every business there are at least moderate hazards and risks. This factor represents a minimum premium an investor would require to consider a closely-held business investment.

Industry Risk
The purpose of this element is to provide a reasonable estimate of the relative risk the industry in which the business operates may have in relation to the economy as a whole and other unique characteristics affecting the business. Each industry has a different level of risk in relation to other industries. Some industries are more susceptible to economic recessions than others.

Business Risk
This risk factor represents a personalized valuation element which acknowledges that no two businesses are exactly alike and that this particular business may have unique characteristics which should be considered in the appraisal.

Financial Risk
The financial risk factor is a value assigned to the risk element relative to the debt structure of the business. As a business increases the proportion of its debt, its debt service cash demands increase the probability that it will be unable to meet its commitments.

Management Risk
This factor considers the skill and special abilities of the owner, management and key employees of the business in relation to the profitability of the business.

There are two valuation approaches to valuing a business.

Asset Valuation Approach
The Asset Valuation Approach does not consider future earnings or profitability. Rather, the asset valuation methods consider the business to be a collection of assets which have an intrinsic value to a third party in a liquidation sale. The liquidation value of the assets in this context is not a forced sale, but rather a planned, systematic, and orderly sale in a competitive market. The resulting asset values represent the expected realizable proceeds from such a sale of the assets.

It is appropriate to value a business under an asset approach in all appraisals even when it is not planned to be liquidated. The asset appraisal methods provide a baseline to understand the minimal value of a business, such as in liquidation, as well as for purposes of identifying component elements of value. The asset valuation methods considered in this appraisal are:

  • Book Value Method
  • Economic Balance Sheet Method
  • Liquidation Method

Income Valuation Approach
The income valuation approach relates to a future return on investments in the business as a continuing going concern. The income valuation methods considered in this appraisal are:

  • Capitalization of Earnings Method
  • Excess Earnings Method

Small Businesses should be "discounted".

A "discount" is a reduction in the value of the interest being appraised because of specific facts which make it worth less than its proportionate share of the total business value. Also, conditions may exist that cause the entire business to be subject to a valuation adjustment which cannot be adequately considered in the application of appraisal methodologies.

Lack of Marketability Discount
In closely held businesses, a discount for lack of liquidity (marketability) can be incorporated in the development of an appropriate capitalization rate or it can be applied after the preliminary appraisal value has been determined. The lack of marketability discount reflects that there may be no ready market for the shares of a closely-held corporation. It also relates to whether the interest can be sold and how much effort must be endured in selling the interest to a willing buyer.

Minority Interest Discount It is generally accepted by courts, the IRS, and appraisers that where the interest being appraised cannot control the business, the value of the interest is worth less than its proportionate share of the total value of the business. This discount is called the minority interest discount. Control means that, because of the interest owned, the stockholder can unilaterally direct corporate action, select management, determine executive compensation, decide the amount of dividends paid, rearrange the corporation's capital structure, and decide whether to liquidate, merge, or sell assets.

Reinhart & Company CPA's has the experience and expertise
to prepare business valuations for various needs.
Give us a call to find out what the next step is to having a business valuation!