Business Valuations: How much is your business worth?

If someone gave you a blank check and asked that you fill in the amount that you believe your business is worth, would you be able to do it? Would the amount you place on the business be too high or worse, too low?

“Everything is worth what a purchaser will pay for it.” (Publius – 1st Century B.C.) Oliver Wendell Holmes said, “all values are anticipations of the future.” People buy businesses to realize a present and future benefit. The most prevalent reason to value a business is to determine what price should be paid between a buyer and seller.

There are many reasons, other than sale or purchase, which will require a business to be appraised. The value of a business may change depending on the purpose of the appraisal.

Some of the reasons why businesses are valued are as follows: for sale or purchase of a business, allocation of purchase price for a variety of purposes, divorce settlements, estate or gift tax planning purposes, spin-off of part of a business, determine true return on investment, dissident owners and shareholder dissent litigation, liquidation of a business, condemnation by a governmental body, employee benefit plans, buy and sell agreements between owners, financing purposes and for certain property taxes.

Once the purpose of the valuation is determined, then generally a qualified business appraiser will employ a ten-step valuation process. This process is as follows:
(1) Determine the date of valuation, (2) Define what is to be valued, (3) Obtain and analyze the financial statements, (4) Interview the owners, managers, and others, (5) Prepare adjusted and projected financial statements, (6) Develop comparable data, (7) Value individual tangible assets, (8) Value goodwill and other intangibles, (9) Apply established valuation methods to the business, (10) Correlate data and develop a value opinion.

The more thorough the valuation process, the greater weight it holds if challenged in court or by the taxing authorities. Qualified valuation consultants can also serve as forensic accountants and as expert witnesses. They often testify in cases validating or questioning valuations of businesses frequently pointing out fraud in legal cases. This makes it essential for CPAs to recommend to clients that they only use qualified valuation consultants.

There are many techniques and tools that professional business valuation consultants have at their disposal. Having a valuation consultant who is also a CPA adds credibility and gives the consultant additional resources from which to draw. These additional skills help to ensure competent, accurate and credible business valuations. Just like a good business plan, a recent business valuation is important to have. Having an exact idea of what a business is worth gives the business owner(s) a number of opportunities and options that may be needed for expansion, retirement or rapid sale of a business.

The following article has been provided by Anthony Basile, CPA. Anthony Basile’s firm is a member of the National Network of Accountants Preferred Provider Network. For additional information about this matter or about Anthony Basile’s firm contact (516)741-5100 or via e-mail abasile@basilecpa.com. For additional information about the National Network of Accountants and the programs that it offers please go to www.nnaplan.com on the Internet.

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