Valuing Your Company: What to Know Before Seeking Business Valuation
By Brittney Neal
Updated 7/30/2019. Businesses change hands all the time, for a variety of reasons. Whether they’re sold, gifted, merged, passed on to next of kin, or divided among former partners, family members or divorcing spouses, ownership of even the most stable of businesses at some point will change.
And when a business changes hands in whole or in part, the parties involved need to have an accurate picture of the value of the sum total of the company’s assets. That makes a business valuation an essential part of any transfer of assets or ownership stake.
Here are some things to keep in mind prior to obtaining a business valuation.
The purpose of the valuation
The assets of a company can change hands for a number of reasons, and those reasons can affect how the business is valued. For example, valuations for gift and estate tax returns are calculated differently than valuations for shareholder disputes and divorces.
The date of the valuation
The valuation date can considerably impact the value of a business. For example, the value of a business that deals in real estate would have likely dropped significantly in 2008 and ’09 relative to 2007 and before, due to the housing market crash and its effect on real estate.
The standard of value
Valuations fall into three categories: fair market value, fair value and strategic/investment value.
The IRS defines fair market value as the price at which a property would change hands between a willing buyer and willing seller, with both parties having reasonable knowledge of all relevant facts.
Fair value is generally used in dissenting stockholder cases and divorces. Each jurisdiction has its own definition of fair value, but in general, it is defined as fair market value excluding any discounts for lack of marketability or control.
Strategic/investment value is the value to a specific investor based on that person’s requirements and expectations. This is used in mergers and acquisitions when the buyer of a business is planning to make changes to the business, such as eliminating product lines or positions.
The premise of value
The premise of value is an assumption of the most likely set of circumstances that may be applicable to the valuation. Here, there are four categories.
- Book value — total assets less total liabilities
- Going concern – the value for a business presumed to continue operations
- Liquidation — value if the business were to be terminated with all assets sold
- Replacement value — the cost to replace all assets with newer assets