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Business valuation has frequently been referred to as art based on science, as a significant amount of informed professional judgment and careful consideration of the unique facts and circumstances of each business are critical in performing a credible valuation analysis. Business valuations are performed because ownership interests in privately held companies often represent a significant portion of one’s estate and/or portfolio. The value, or worth, of an interest in a privately held company, as opposed to stock in a public company, is usually unknown because there is no active market to sell or trade that interest from which to ascertain or approximate a value.
The result of an inaccurate value determination, regardless of whether it is high or low, generally leads to undesirable consequences. 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.
Valuations as a Value-Added Service
Possibly one of the best reasons for obtaining a business valuation is for use as a management tool. A prime objective of every business enterprise, large or small, is to improve and maximize its value to the owners. This is a necessary business requirement to justify the investment of time and, more particularly, capital. This valuable measurement tool that helps evaluate overall progress towards goals and management effectiveness.
Calculation of Value
In situations where a conclusion of value is not required, what is referred to as a calculation of value can serve as a cost effective valuation report for value-added purposes. Unlike a conclusion of value, with a calculation of value the valuation methods used in determining value are discussed and agreed upon beforehand between the client and the valuation analyst. Additionally, there are reduced development and reporting requirements compared to conclusion of value engagements. As a result, the valuator does not offer an opinion of the value and calculations are not generally defensible in litigation settings. These differences make a calculation of value ideal for strategic planning purposes and they generally cost considerably less.
Experienced Business Valuators
Understanding the Business
To properly value a business there must be 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, as well as 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 impact value. Additionally, the valuator must analyze the inherent financial health of the enterprise and its future profit potential.
Determining the true value of a business enterprise requires a careful analysis of two primary components that make up value: tangible assets and various intangible assets. This determination requires a careful analysis of the many aspects and facets of a business enterprise utilizing knowledge acquired through training in all aspects of business fundamentals.
Sorting through a Complex Process
Overall, the process is highly complex and requires a significant amount of time. Indeed, this is what is required to determine true economic value of a privately owned business enterprise, and this is what a CVA can bring to your company. As certified members of NACVA we are required to adhere to industry standards in performing valuation services, communicating their conclusion of value and adherence to ethical guidelines in the performance of valuation engagements. Standards are intended to assure users the services they receive meet an industry-acceptable level of due care, including the thoroughness of the analysis and communicating the results.
We perform valuations in the following areas:
Damages Calculations for Litigation
Dissenting Shareholder Actions
Estate Tax Planning and Determinations
Family Limited Partnerships
Gifting Programs and Gift Taxes
Purchase, Sale, Merger of a Business
Split-Ups/Spin-Offs of a Division or Subsidiary
Venture Capital and Other Forms of Financing
For more information, please contact:
George M. Thomson, CPA/ABV
More Than Adding Numbers… Adding ValueSM
"An Independently Owned Member of McGladrey Alliance"