Things you need to know about Business Valuations

Importance of industry standards

The business valuation industry provides standards for the performance and communication of its services, to:

Assure users they receive services that meet industry acceptable level of care, due diligence, thoroughness, and quality

Assure valuator adheres to ethical guidelines

Affiliation with the Institute of Certified Business Appraisers is your assurance that your valuator adheres to industry standards.

What about rules of thumb to value my company?

Rules of thumb are formulas based on industry averages of companies sold, using their sales price compared to either annual sales revenues or profits. As such, the actual sales price of an individual company is either higher or lower than the average. Rarely does it fall right on the average, so the results will be misleading.

Plus, the purpose of a valuation affects the methodology and assumptions used. The value determination for a company up for sale, for example, will be different than the value determination for the same company for the purposes of a divorce or estate tax calculation.

How long does it take to prepare a business valuation?

It takes at least 3-4 weeks to perform a thorough analysis, make a qualified value determination, and prepare a proper report. It may take longer if there are peculiar circumstances involved, such as:

Difficulty obtaining needed information

A unique and/or specialized industry

A litigious situation requiring special care and preparation

Does book value equal company value?

Rarely. It’s usually much lower than the true value. It reflects only the cost of the company’s tangible assets net of depreciation and liabilities, ignoring appreciated asset values and company intangible values such as goodwill.

Are values of privately held companies comparable to those of publicly held companies?

Generally, no, for two reasons:

1. Because there isn’t usually a ready market for investors to buy stock in a private company, the valuator will often deduct a “Lack of Marketability Discount” to adjust for the cost required to take a company public and/or sell the business through a broker.

2. There is greater risk in ownership or investment in smaller companies, which privately held companies typically are. Thus, the expected rates of return used by a prospective owner or investor to value a privately held business are typically higher.

How can I get maximum value for my company when I retire?

By including the value of goodwill.

Historically, owners of private companies have looked to cash flows and tangible assets for company value, so at retirement they get less value by selling only the tangible assets or simply liquidating inventories and closing their doors. But much of America’s wealth is tied up in privately owned companies and is attributable to business goodwill. According to Robert Avery and Michael Rendall of Cornell University, in a study referenced in the Wall Street Journal in June 1996: “The greatest transfer of wealth in history will occur in this country over the next decade; an estimated $10 trillion is expected to change hands, and much of this wealth is tied up in family business stock.”