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Many business owners believe the value of their business is net profit, or gross sales, multiplied by an industry rule of thumb. This is simply not the case. In fact, the application of an industry rule of thumb formula often results in a value determination that differs greatly from the actual value that could be determined by a Certified Valuation Analyst.
The result of an inaccurate value determination, regardless of whether it is high or low, generally leads to undesirable consequences. For instance, if the value is too high, estate taxes will be too high; savvy investors or prospective buyers will usually disregard a value that appears too high. If the value is too low, you can be sure savvy investors or prospective buyers will recognize it and take advantage. Likewise, if you are on the other side of the dispute in a dissenting shareholder action or divorce, you certainly want to know you are receiving an accurate value for your interest. Validation will include an accurate and peer review outcome.
Determining the true value of a business enterprise requires a careful analysis of two primary components that make up value: tangible assets such as real estate, specialized equipment or machinery, used by the business; and various intangible assets such as business or personal goodwill. Intangible assets might also include customer lists, trademarks, copyrights, distribution rights, a superior management team, non-compete agreements, physical location, special processes, and name recognition.
To properly value a business enterprise, the CVA must acquire a thorough understanding of every aspect of a company’s dynamics, including: management capabilities, company strengths, weaknesses and vulnerabilities, the competitive environment, overall expectations for the marketplace, and future economic prospects for the industry and the economy in the region and as a whole. All of these elements affect the risk of ownership in a particular enterprise, and risk directly impacts value. Additionally, the valuator must analyze the inherent financial health of the enterprise and its potential future profit.T
Purposes for Valuation:
Expert Testimony/Litigation Sale/Acquisition
Buy-Sell Agreement Recapitalization
Issuing Stock
Intellectual Property Determination of Lost Profits Fund Buy-Sell
Shareholder Disputes
Fairness Opinion
Litigation
License, Royalties
Gift or Asset Transfers Succession Planning
Economic Loss
Marital Asset Dissolution Purchase Price Allocation
Estate Planning
Strategic Planning
Compliance: FAS 141 / 142 Employee Benefit Plans Charitable Contributions