Business Valuation: When Would You Need the Service?

Author: Nasreen Haque

The most common occurrence that would give rise to the need for a business valuation professional is the sale or transfer of one's business. Those who are contemplating a sale, as well as those interested in purchasing a going concern, each alike, can benefit greatly from the services of a business valuation professional.

Many businesses may not understand — or appreciate — that the true “value” of an enterprise is comprised of many different and varied components requiring sophisticated financial analyses. As a business owner, how would you determine a price for the sale of your business? Would your computation be limited solely to a review of the gross receipts from your most profitable year?

For purposes of establishing a sales price, how will the present value of any lease payments be determined? What is the proper method for appraising any real estate owned — property tax assessment or comparable worth? Should accounts receivables be discounted due to aging?

Just because an asset may be intangible doesn't necessarily mean it has no "value" for purposes of a sale or transfer of your business. Would you know enough to assign a value to your business’s goodwill? How about the value of your customer lists, which have taken you years to develop?

These questions illustrate the need for professionals who have the expertise to address each of these important elements and help insure that all components that constitute an enterprise’s worth are not overlooked and are properly factored into a determination of its value.

Additionally, business valuation companies can ably assist with the often times cumbersome valuation of a company’s intellectual property: patents, royalty or license payments and any registered trademarks or copyrights.

Given their proficiency in utilizing sophisticated financial modeling techniques and performing discounted cash flow analyses, business valuation companies specialize in making just such determinations that are based on a range of factors that insure that the value assigned to a business is truly reflective of its intrinsic worth.

Another common situation for which the services of a business valuation firm will prove indispensable is ascertaining the value of shares for private companies whose stock is not publicly traded. Problems of valuation arise for stock transfer restrictions or rights of first refusal, as well as buy-outs or attempts to squeeze-out minority shareholders.

Shareholders of closely held corporations would be wise to agree in advance to jointly name a business valuation service that would conduct a fair share price valuation. This would help eliminate valuations that are speculative or grossly inequitable, and would help avoid costly and time-consuming litigation resulting from shareholder disputes. By virtue of their expertise in these matters, courts frequently rely on business valuation firms to assist them in making these complex appraisal determinations.

Not surprisingly, few if any, individuals have the accounting background, the sophisticated financial modeling expertise, and the knowledge of accepted valuation methodologies, to perform these tasks competently by themselves. As such, they would be well advised to enlist the services of a business valuations professional. Bottom of Form

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