Business Valuations

What is a Business Valuation?

A Business Valuation ultimately arrives at a “concluded value” which is the overall best estimate of value the valuation analyst can determine given the unique set of facts and circumstances of the business under consideration. A valuation is a comprehensive look at a business or business unit, which takes into account many factors, including the financial history of the business, the projected financial future of the business, the economy, the industry, ownership structure, type of entity, and more. Valuators must deal with three possible choices of the standard of value to be used:  Fair Market Value, Investment Value, and Fair Value.

Determining Value vs. Proving Value: What type of valuation do you really need?

When considering any valuation project, a good question to ask is: Do I need a valuation to prove the value to another party such as a judge? Or am I just trying to figure out about what it is worth? Proving value and simply determining value for reference purposes are two different things. Proving requires much more documentation and work.

Common reasons for needing to prove value are a marital dissolution or business partner buyout, setting up an Employee Stock Ownership Plan (ESOP), a recapitalization of a business, a stock buyback, getting a new round of capital, liquidation, settling an estate, and defending against an IRS tax claim.

Common reasons for wanting to know value are for business exit planning, legal strategies, Merger & Acquisition strategies, and insurance purposes.

Business valuations vs. other types of appraisals

Unlike a static real estate appraisal of a house or piece of equipment, a business valuation must consider tangibles and intangibles, historical financial data to back up conclusions, many risk factors, and sometimes evaluations of projections into the future. Large industry data bases are typically researched to obtain company comparative data, often requiring much hand adjustment to be accurate. Determining the value of one particular owner’s stock is a separate calculation, often involving multi-factors such as size of holdings and marketability.

Typically, the businesses we deal with are “going concern” businesses, meaning they are reasonably expected to continue in operations for the foreseeable future. Sometimes we deal with companies that are not going concerns but in bankruptcy or liquidation.

Choosing your Valuation Expert: 7 Questions to ask before you engage them

  1. Is the Valuator a Certified Public Accountant? In what state?
  2. What credentials does the Valuator hold?
  3. Does the Valuator have experience in your industry?
  4. How many business valuations has the Valuator completed?
  5. Has the Valuator ever been sued for professional malpractice?
  6. Has the Valuator testified in court concerning Business Valuation matters?
  7. Has the Valuator ever actually run a business?

BLACKTHORNE SEVEN STEP VALUATION PROCESS ™

This is the process we use to efficiently conduct a valuation project:

  1. We conduct an initial questionnaire/feedback to determine what is needed for your project.
  2. An Engagement Agreement is executed, with a 50% down payment paid.
  3. We e-mail you a confirmation/receipt, with an estimated Report completion date.
  4. You assign a point person; provide the information requested in the List of Items Needed. Most, if not all of this data can usually be electronically sent to us.
  5. In two-three weeks, we will complete a Draft Report for your review, and set up a web conference or face to face meeting to hear your comments and answer questions.
  6. You remit the remaining 50% of the fee and we release a PDF version of the Draft Report to you.
  7. After your draft comments are heard and considered, a Final Edit PDF Report is e-mailed to you.

To get started with a Business Valuation,  please use our contact form to provide the following information to our CEO, David Wimberly. Responses are confidential and normally require 24 hours or less for an initial answer.

  • Your own statement of what you would like us to help with, and what timing you are looking for
  • Your name, preferred phone number and email address
  • Company name and web address
  • Company EBITDA (numbers) for last 3 fiscal years

Definitions:

There are three different standards of value a business valuation can be based upon:

Fair Market Value – FMV was defined by the Internal Revenue Service in 1959 in Revenue Ruling 59-60 and is defined as: “the price at which property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having a reasonable knowledge of relevant facts.” FMV assumes the sale is between a hypothetical willing buyer and seller. Accordingly, this concept is a “value-in-exchange” FMV is typically used when a Business Valuation will be subject to review by the IRS. Examples are estate and gift tax valuations, or income tax related valuations. Many times when a company is considering an exit plan, FMV is used because these choices will likely be subject to IRS review.

Investment Value – Investment Value takes FMV, defined above, one step further. Fair Value is the value when a buyer is a known person or entity, not an unknown person or entity as in FMV. An example would be if a computer software company is deciding whether to sell to Microsoft Corporation. Then there would be a known buyer with specific attributes which might generate synergies to the buyer, which would create more value, which is called a “premium”. Investment Value is sometimes called “synergistic value”.

Fair Value – There are two types of “fair value”. One is a term which is defined by state law, and is unique to each state of the union. This is most often used in divorce cases as well as shareholder disputes. Another is derived from recent financial accounting developments and deals with financial statement presentation issues. We can readily determine if these issues apply to your company.