The Business Valuation Process
To establish a value for an entire or partial interest in a closely held business or professional practice, the valuator must take into account both quantitative and qualitative tangible and intangible factors associated with the specific business being valued.
The value of an interest in a closely held business is typically considered equal to the future benefits that the holder will receive from the business, discounted to the present at an appropriate discount rate. There are many subsets of value: fair market value, book value, replacement value, liquidation value, going concern value, loan value, insurable value, appraised value, to name a few.
The most widely recognized and accepted standard of value in the United States is fair market value. It is the standard used in all Federal tax matters. It is defined in Revenue Ruling 59-60 as: The price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the seller is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.
It is important to remember that the “willing buyer and willing seller” are hypothetical, not specific. The practice of business valuation has been evolving from that of an art to become more scientific. It is probable that no two valuators will come up with the same number. However, given the state of practice today and court case precedents, the values should be close.
In performing a valuation, O’Dell Valuation Consulting LLC will meet with the business owners to determine the reason for the valuation and to obtain an understanding of the business. A tour of the facilities is required to observe the condition of equipment and to speak with management. The starting point for the valuation is an analysis of the last five years of financial statements. If available, projections for the next several years are helpful. The business results are compared to industry data, current national and local economic data is studied and a search is made for sales of comparable companies using national data bases.
Several different valuation methodologies are used (asset, market and income) and evaluated for appropriateness. An engagement to estimate value culminates in the expression of either a conclusion of value or a calculated value and a written report which must adhere to professional standards.
We bill our valuation engagements on a fixed fee basis. Fees are set in advance along with a payment schedule. A contract is drawn up outlining the scope of the project. Any changes, additions or contractions to the scope of work are handled in a change order to the original contract.
Top Reasons why a business may be valued:
- Exit/succession planning
- Estate/Inheritance taxes
- Gifting of business interests
- Mergers and acquisitions
- Selling interests to new shareholders
- Determining the proper amount of buy/sell life insurance
- An event that triggers a buy/sell agreement
- Retirement of a shareholder
- Capital infusions
- Employee Stock Ownership Plans
O’Dell Valuation Consulting LLC CPA has performed valuation services for companies in the following industries:
- Government contractor
- Wholesale distribution
- Gas station/car wash
- Boat builder/marina