Types of Business Valuations

So, what’s your Business really worth?

How many times have you heard a so-called “expert” tell you the value of a business is a multiple or percentage of this or that? This so called “valuation” is nothing more than a “rule of thumb” (a principle with broad application that is not intended to be accurate or reliable) probably obtained from hearsay or the internet and your strategic business planning deserves better. Valuing a business takes skill, experience, independence and of course, certification.

Types of Reports

There are varying uses and types of value requested by the users of our reports which can be broken down into 3 types of reports:

  • “Appraisal Report”…simply stated, “an independent, defensible estimate of value”. Specifically, a formal presentation of the value of a Business based upon the standards of the National Association of Certified Valuators and Analysts, containing a summary of the material factors that lead to a appraisal report. Ideal for most of the uses below and range in cost from $5,000 to $10,000.
  • “Calculation Report”…though not an appraisal, its an accurate, efficient and cost effective alternative to an appraisal based on the performance of limited procedures. Ideal for smaller businesses in contemplation of buy or sale, amicable divorce and partnership dissolution’s as well as business exit planning ranging in cost from $2,100 to $2,500.
  • “Market Report”…instead of an appraisal, many business owners prefer to know the general value of their business based upon comparable sales of similar businesses. These reports range in cost from $750 to $1,000 and are best suited for small “mom and pop” businesses with very few employees.

Types of Value

Also known as Standards of Value, this refers to the definition of value used in a particular report. There are varying types and definitions including Fair Value and Investment Value but the most commonly used is Fair Market Value which can be defined as:

  • the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Approaches and Methods to Business Valuation

There are distinct differences between approaches and methods. An”Approach” is a general way of determining a value indication of a business whereas a “Method” is within an approach and is a specific way to determine value.
Conceptually, there are three broad approaches to value each containing various business valuation methods:

  • “Asset Approach”…a general way of determining the value of a business based on the value of the assets net of liabilities using one or more methods such as the “Adjusted Net Asset Method”, the “Excess Earnings Method” and/or the “Liquidation Method”.
  • “Income Approach”…a general way of determine the value of a business using one or more methods that converts anticipated economic benefits into a present value single amount such as the “Capitalization of Earnings Method” or the “Discounted Future Earnings Method”.
  • “Market Approach (Market Valuation)”…a general way of determining the value of a business using one or more methods that compare the subject business to similar businesses that have been sold in the marketplace using a “Transaction Method”, Merger & Acquisition Method”, or “Guideline Public Company Method”.

You probably need a Certified Valuation if

  • You’re a financial professional developing an estate plan to protect your client’s wealth.
  • You’re planning gifts of stock or partnership interests in a successful business
  • You’re creating a Family Limited Partnership
  • You’re developing or managing an ESOP
  • You’re involved in a partner buyout or partner dispute.
  • You’re trying to determine value for a divorce settlement.
  • You need to negotiate an insurance settlement.

Questions? Give us a call, we’ll be happy to discuss your business valuation needs in private.