Top Five List
1. Recognize the need
There is never one “exact” value for any business; what may be an appropriate dollar figure to use in one situation, may not work in another. That is why it’s important for you to recognize the ultimate need of your client, before assessing the possibility of a business valuation. There are several reasons clients might need a business valuation, such as:
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Purchase or Sale of a Business |
Exit Planning |
2. Insist on an appraiser with experience and credentials
Each business appraisal is unique, and experience counts. Most business valuation firms are generalists rather than industry specialists, but the experience gained in discussing operating results and industry constraints with a broad client base gives the appraisal firm lots of ammunition to understand your client’s special situation. Credentials do not guarantee performance, but they do indicate a level of professionalism for having achieved and maintained them. Insist upon them.
3. Understand the standard of value
There are different standards of value for appraisals under different circumstances and in different jurisdictions. Typical tax compliance appraisals are based on “fair market value”; certain jurisdictions require “fair value” in dissenters’ rights and divorce cases; and “liquidation value” may be appropriate in other cases.
4. Understand the appraisal process
Each business appraisal takes into consideration all elements of appraisal listed in Internal Revenue Ruling 59-60, as well as the Uniform Standards of Professional Appraisal Practice, which generally outlines the valuation of closely held stocks and considers each of the following:
- The nature and history of the business.
- Financial and economic conditions affecting the business enterprise, its industry, and general economy.
- The book value and the financial condition of the business.
- The company’s earnings capacity.
- The company’s dividend-paying capacity.
- Whether the company has goodwill or other intangible value.
- Past sales of capital stock or other ownership interests in the business enterprise being appraised.
- Sales of similar businesses or capital stock of publicly or privately held similar businesses.
5. Know the primary business valuation methods
Business valuation is an art as well as a science and appraisers will utilize and give different weights to various valuation methods as they suit the particular needs of an assignment. Key methods typically utilized include: transactions method (focuses on actual transactions in the security being appraised); underlying net asset value method (considers estimates of fair market value of the entity’s net assets, on a tax-adjusted basis); capitalization of earnings method (based on estimates of underlying earnings power times a derived capitalization rate); guideline company method (similar to using the capitalized earnings method, but uses comparable, or guideline companies to derive the appropriate capitalization rate); discounted cash flow (derives the present value of future cash flows, based on a combination of projected future cash flow and a derived discount rate appropriate to the situation). Other valuation methods may be appropriate to certain companies in specific industries where particular comparable transaction data may be available.
TRANSACTION VALUATIONS
- Buy/Sell Agreements
- Business Exit/Succession Planning
- Fairness Opinions
- SBA Loans
- ESOP
LITIGATION SUPPORT VALUATIONS
- Divorce Cases
- Shareholder Disputes
- Lost Profit/Economic Damages
- Expert Testimony
TAX VALUATIONS
- Charitable Contributions
- Estate & Gift Taxes
- Family Limited Partnerships
- C to S Corporation Conversions