Perhaps the best way to explore this topic is to ask: what, why, how and who?
What is it? Business valuation is a process where a valuation analyst uses a set of documents (such as financial statements) and other pertinent information (such as economic and industry data) to provide an opinion or conclusion of the value of an entity or of an investment in an entity.
Why do it? If you own an interest in a public company, it’s easy to determine the value – you can just look it up on-line or in the Wall Street Journal. However, determining the value of a company or investment that is not publicly traded is no simple matter. Although there are “rules of thumb” and “guideline values”, most often the situation requires a more thorough and supportable process and outcome. Business valuations are useful, and sometimes required, for many different purposes. The most common uses we encounter are: financial or estate planning; facilitating ownership changes; the sale or purchase of a business; ESOP retirement plans; divorce; charitable gifts; and estate tax, estate settlement or basis step up matters.
How is it done? Business valuation requires the analyst to gain an understanding of the subject of the valuation, both from a historical perspective and from a forecast or earnings potential perspective. Often the value of a business is related to the expected benefits to the owner rather than its historical performance or its current financial position. There are also different standards of value and different approaches to computing a value. Pass through entities (LLC’s, Partnerships, S Corporations) require special valuation considerations. The analyst also considers technical matters such as control and marketability.
There are requirements to follow in performing a valuation. Sometimes the IRS or others prescribe the valuation methodology we use. The IRS also requires that a qualified appraiser be used for charitable gift related valuations. We also follow standards established by the American Institute of Certified Public Accountants in performing valuations.
Who should do it? We are uniquely qualified to assist you with valuation services. Paul Wassink, CPA of our staff holds the Accreditation in Business Valuation (ABV) certification issued by the American Institute of Certified Public Accounts, and has performed valuations for many different purposes and industry situations.