Introduction to Business Valuation: What is Business Valuation?

If you own a business, it is frequently among your most valuable assets. However, do you really know what that business is worth?

Over the next few posts, we’re going to review the basics of business valuation, including the various methods of establishing value and how to choose the method that best applies.

What is Business Valuation?

Business valuation is the art and science of establishing the worth of a privately-held business.  Oftentimes, a privately-held business represents the largest asset of an individual.  There are times when valuation is required (e.g., death, divorce, gifting) and other times when valuation is not required but used as a management tool (e.g., planning, establishing a buy-sell, determining life insurance needs).

How do I get started with a business valuation?

An initial conversation with a valuation professional will include the following topics:

  1. Purpose of the valuation – The purpose is essential to the engagement because it typically drives the standard of value.  For example, if the valuation is being prepared for estate tax purposes because the business owner has died, the standard of value is Fair Market Value.  The Fair Market Value standard is outlined by the IRS as a hypothetical willing buyer and a hypothetical willing seller both with knowledge of all relevant facts and neither under a compulsion to buy or sell.
  2. Standard of Value – At its core, the standard of value typically drives whether or not discounts are applied.  It is essential to understand the standard of value and to work with an appraiser who can clearly articulate the differences.
  3. Valuation date – The valuation date is the date on which the analysis is to be performed.  In the case of a gift, the valuation date is the date on which the gift is to be given (or as close as possible based on the financial data available).

What are the basic valuation mechanisms?

In our next few posts, we’ll take a closer look at the three main approaches to valuation, including:

  1. Market approach
  2. Income approach
  3. Asset approach

In the meantime, if you have valuation issues or questions about business valuation services, please contact Courtney Sparks White, J.D., LL.M., ASA, CVA of Columbus, Ohio CPA firm Clarus Partners at cwhite@claruspartners.com or 614-545-9100 x11.

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