Do you know what your business is really worth? That question can only be answered by addressing some other related questions, specifically; Who’s asking, and for what purpose?
From the perspective of the business owner, prospective buyers, the IRS, banks/lenders, and divorce/bankruptcy courts, the value of a business for purposes of a sale, estate planning, orderly liquidation or forced liquidation, gifting, divorce, etc. can be vastly different.
Intrinsically tied to the various purposes of valuation are numerous definitions of “value.” Here are a few examples:
Fair Market Value (“FMV”) is the most widely recognized and accepted standard of value and is relevant when appraising a business in contemplation of sale.
Investment Value is the specific value of an investment to a particular investor based on individual investment requirements, such as return on investment (ROI).
Going Concern Value is the value of a business that is expected to continue to operate in the future.
Liquidation Value is the net amount that would be realized if operations ceased and the assets are sold piecemeal.
Book Value is the difference between the total assets and total liabilities as accounted for on the company’s balance sheet.
Exploring valuation techniques requires an understanding of the tools available to the Appraiser. Which tools are utilized depends in part on the purpose of the valuation and the circumstances of the subject company. Generally there are several different methods. Listed below are the three major approaches along with some examples of specific methods that fall under each category.
· Adjusted Net Asset Method
· Excess Earnings Method
· Discounted Cash Flow Method
· Single Period Capitalization of Earnings Method
· Comparable Publicly Traded Company Analysis
· Comparable Merger & Acquisition Analysis
All of the above methods and approaches are frequently used in business valuations.
It is not uncommon for business owners to place a higher value on their business than anyone else. Conversely, buyers often undervalue businesses. In their quest to “buy right,” buyers often end up paying a lower multiple for a company with serious negative factors, while passing up on higher multiple opportunities, which due to the quality, are actually better buys. Both buyers and sellers have to be realistic in their expectations.
Valuation is a complex process. Therefore, owners and buyers are best served when they rely on the services of a professional business appraiser.