A business valuation captures the value of a business at a particular point in time, for a particular purpose. This value represents the present value of the future benefits that the owner(s) can expect to receive. Value is not a single number because value can be defined differently for different purposes.
The definitions of value and the specific use of the valuation result are referred to as thestandard of value and the purpose of the valuation. A business can have different values depending upon the appropriate standard of value. Accordingly, a business can have different values for estate tax reporting, a sale to a industry consolidator, and for equitable distribution in a divorce. The date is also critical, because the value can change from one date to another.
Price should be differentiated from value. Price is a negotiated amount between two parties for a specific transaction. The parties to the transaction may have different requirements of the transaction, influencing them to act.
The valuation process involves applying methodologies that fall into general categories called approaches. The three approaches are the assets approach, the income approach and the market approach. The selection of the appropriate approaches and methodologies is based on the type of business as well as the facts and circumstances. In some cases, methods from all three approaches are used, and in other cases only one method may be appropriate.
The valuation process involves the evaluation and consideration a number of factors basic to most engagements including: the nature of the business, its history, the economic environment, the industry outlook as it affects the business, its financial condition, earning and dividend paying capacities, and any goodwill or intangible assets of the business. As part of the process it is also necessary to consider prior sales of interests in the business, as well as the size of the interest and market data available. While these factors were first outlined in Revenue Ruling 59-60, they have become generally accepted as items to be considered in valuation analysis.
Find out more about the three types of valuation approaches:
If you need more information about having your business valued, call Yip Associates at 954.966.7465 or email email@example.com for more information.