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BASIC SUMMARIZED INFORMATION FOR UNDERSTANDING PROFESSIONAL BUSINESS VALUATION

Why and what for would you need the services of a professional business appraiser?

  1. Buy/sell transaction of a business, or business interests
  2. Estate settlement or estate planning
  3. Marital dissolutions, often requiring the valuation of professional practices and other interests
  4. Shareholder’s disputes, or parties in conflict requiring the partition of business assets
  5. Buy/sell agreements
  6. Financing with SBA participation
  7. Financial reporting (Financial Accounting Standards Board)
  8. Impairment analysis (impairment analysis is an accounting term most often applied to goodwill. In short, goodwill is the amount an individual pays for a company over and above the company’s net book value.
  9. Mergers and acquisitions
  10. Employee stock ownership plan(ESOP)
  11. Appraisal review
  12. Litigation support
  13. Business restructuring & Improving shareholders’ value

Who would engage the services of a professional business appraiser?

  1. Sellers or buyers of a business or business interest
  2. Accountants/CPA’s
  3. Attorneys
  4. Lenders (SBA)
  5. Courts
  6. Brokers
  7. Mediators, Arbitrators
  8. Client referrals

Commonly valued interests

  1. Invested capital (debt and equity)
  2. Equity
    1. Controlling interests, as an example > 50%
    2. Majority interest in a non-controlling formation, as an example 30%, 20%, 20%
    3. Minority interest, as an example < 50%
    4. Minority interest in a controlling formation, as an example 2%, 49%, 49%

Commonly applied discounts

  1. Discount for lack of marketability (DLOM)
  2. Discount for lack of control (DLOC)
  3. Key person discount

Approaches and common methods developed in business valuations

  1. Sales Comparison; Direct Market Data Method, Guideline Company Method, Seller’s Discretionary Earnings, past similar interest transactions of subject company
  2. Cost; Net Asset Value Method, Excess Earnings Method
  3. Income; Single Period Capitalization Method, Multiple Period Discounting Method, Discounted Cash Flows.

Types of value that maybe sought

(The definition of the value sought must be clearly stated and defined in the report and understood by the reader. For the purpose of example, we define below the elements present in Fair Market Value (FMV)). Other types of economic value follows.

  1. Fair Market value
    1. Most probable price at which the interest will exchange hands (it is a value in exchange)
    2. The transaction is in cash or its equivalent
    3. A willing buyer
    4. A willing seller
    5. Neither being under any compulsion to buy or sell
    6. Both having reasonable knowledge of the relevant facts
    7. As of a specific date, and considering subsequent events
  2. Fair Value
  3. Investment Value
  4. Intrinsic Value
  5. Insurable Value
  6. Intangible Value
  7. Synergistic Value

Premises of value (establishes value to whom?)

  1. Value in exchange
  2. Value to the holder

These two premises represent the theoretical underpinning of each standard of value. They represent the framework under which all other assumptions follow.

Operational Premises of Value

The operational premise of value further refines the assumptions that should be made under a given standard and premise of value and may have a significant impact on the final opinion of value of the property or interest being valued, or subject of the appraisal/valuation.

These are:

  1. Going Concern
  2. Liquidation
    1. Orderly disposition
    2. Forced liquidation
  3. Value as an assemblage of assets

By Diego Sorroche Fraticelli

 

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