How much is a business interest worth? This is not an easily answered question. The answer is influenced by:
- economic factors (local, regional, national, and international);
- the premise and standard of value selected;
- the appropriate valuation method; and
- the subject interest being valued.
It is no surprise, not all business valuations are created equal. A credible valuation requires an experienced and knowledgeable professional to give an independent, well-reasoned, and well supported opinion.
Many business owners think the value of their business can be obtained by applying an industry rule of thumb, such as a multiple of sales or net profit. When an in-depth valuation is prepared, the result will often differ greatly from the industry rule of thumb as it considers the various factors listed above rather than just one. An accurate valuation is essential as the determination can lead to undesirable or desirable consequences.
For an estate tax valuation, a value that is too high can lead to increased estate taxes, meanwhile a value too low may lead to an ultimate estate tax return audit. When a valuation is performed for a prospective buyer or a small business owner selling a business, an incorrect valuation can result in prospective buyers walking away from a deal or sellers not maximizing the sales price for a business that represents their lifelong work. In a divorce situation, the accuracy of the valuation will ensure you are receiving an accurate value for your interest.
When determining the value of a business enterprise, a valuation analyst must consider both of the primary components—tangible and intangible assets—that make up a business. The tangible assets include real estate and equipment, and the intangible assets of a business, include business or personal goodwill, trademarks, copyrights, non-compete agreements, location, and name recognition. There are several commonly used methods of valuation. Each method may at times appear more theoretically justified in its use than others. The application of a particular valuation method is entirely based on the relative circumstances for each individual business. The valuation analyst is responsible for selecting the most appropriate method and should base his or her choice of methods on knowledge of the details of the business.
To properly value a business enterprise, a valuation analyst must not only consider the financial statements of a company, but must thoroughly understand all aspects of a company’s dynamics. This includes evaluating management capabilities, the company’s strengths and weaknesses, the competitive environment, and the company’s business process, among others. All of these factors alter the risk in owning a particular business, which directly impacts value. A valuation analyst must also consider the future economic prospects for the company, the industry and current trends, and the current economy as a whole.
All of this information is required to determine the true economic value of a privately owned business enterprise. A certified valuation analyst will select the most appropriate valuation method and apply a series of calculations to arrive at the ultimate business value. Overall, the process is highly complex and requires a significant amount of time.
Selecting a Valuation Professional
When selecting a valuation professional, it is important to find a professional affiliated with a recognized valuation organization such as the National Association of Certified Valuators and Analysts (NACVA). NACVA’s certified valuation analyst designation is the only valuation credential accredited by the National Commission for Certifying Agencies. Certified members of NACVA are required to adhere to industry standards in performing valuation services and communicating their value determinations.
When selecting a valuation professional, it is of the upmost importance that they demonstrate thorough education, training, and experience to value a business enterprise. Selden Fox can assist you in obtaining an accurate valuation for your business.