What is My Business Worth?
Written by: Anthony DeBenedictis, CPA, ABV, CFF, CFE
In simplicity, the value of a business or an asset is the present value of all the expected future economic benefits (income steams). In reality, this is a bit more complex. Business valuation is the process of determining the economic value of a business by taking into consideration a variety of factors. Because the realized value of a business can only be determined through an actual sale, the business valuation process develops an estimation of value through a combination of theory, science and the valuation analyst’s subjective judgment and experience.
The stated purpose (estate & gifting, buy/sell, divorce, bankruptcy, etc.) or simply, why are you valuing the business will determine both the standard of value and the premise of value being considered. Generally speaking, a business valuation is conducted under the fair market value (FMV) standard of value and on the premise of value that a business will continue to operate as an on-going concern.
Additional discounts under fair market value may apply. For a private business that is not freely traded on a stock market, a discount for lack of marketability (DLOM) will impact the final estimate of value. In addition, the size of the block of equity (5% or 100% ownership interest) will impact both the value and the valuation process taking into consideration the concept of control. Company agreements inclusive of covenants and restricted exit rights (the ability to sell) and as well as key man employee agreements will also impact the final conclusion of value.
If you are involved in a buy/sell transaction, performing estate tax planning, documenting post-transaction financial reporting or going through a divorce ABIP Advisors experienced forensics and valuation professionals are here to assist.