Business Valuation Frequently Asked Questions

Understanding the true value of your business can be a game-changer for your financial strategy. Many business owners have significant wealth tied up in their enterprises, yet they often overlook the importance of knowing its precise value. A professional business valuation provides invaluable insights for future planning and strategies to enhance your company’s worth.

The expertise of an accredited appraiser is crucial in obtaining a fair and accurate valuation. These professionals employ industry-standard methods with proven effectiveness, ensuring that the values assigned are both reliable and reasonable. Unlike simplistic calculations that rely solely on multiples of a number on your income statement, an accredited appraisal considers comprehensive approaches and varied assumptions tailored to your unique situation.

Whether you’re planning for succession, considering a sale, or simply managing your business as a strategic investment, a qualified appraisal delivers the reliable value assessments essential for informed decision-making. Investing in an independent appraiser’s expertise is not just about compliance; it’s a strategic move to empower your business’s future growth and success.

Assessing the fair market value of your business requires consideration of several recognized valuation methods. Our accredited experts typically rely most often on the Income Approach. This method assesses the likely future economic benefits of your business for potential buyers by considering both the expected return on investment and the associated risks, offering a forward-looking valuation.

We also employ other methods as needed, such as:

• Asset Approach: This method provides a “floor value” by evaluating your business’s adjusted book value. It assumes a prudent investor will pay no more than this baseline, though it doesn’t account for future earning potential.
  
• Market Approach: This approach compares your business to similar companies, adhering to the principle of substitution. It suggests that a prudent investor will opt for the lowest price option if all other factors are equal.

Each valuation method offers unique insights, ensuring a thorough and tailored assessment of your business’s worth.

The word “value” means different things to different people. Business commerce, the courts and the IRS have established many definitions or standards of “value” for many different purposes. Some of these standards are described below:

• Fair market value – this is the most common standard and is defined as “the amount at which a property would change hands between a willing buyer and a willing seller, when neither is under compulsion to buy or sell and both have reasonable knowledge of all relevant facts.” It is also important to characterize the willing buyer in this definition. See Capital Valuation Group’s Prospect Ranking Chart for a ranking of potential buyers of a business based on willingness to pay more (or less) for an equity interest in a closely held business.
• Fair value – commonly used in situations such as dissenting shareholder actions, minority oppression cases, and dissolution actions. Fair value is defined differently depending on state statutes and accounting regulations, but typically refers to pro rata value, without discounts for lack of control and possibly without discounts for lack of marketability.
• Investment value – the value of an investment to a particular investor or class of investors, based on individual investment requirements and distinguished from fair market value, which is impersonal and detached. See Capital Valuation Group’s Prospect Ranking Chart (add link) for a ranking of potential buyers of a business based on willingness to pay more (or less) for an equity interest in a closely held business.

No. Every closely held business is unique and has different risks and opportunities that need to be reflected in its value. Accounting, under Generally Accepted Accounting Principles (GAAP), was never intended to reflect value. Therefore, applying a multiple to some line on the financial statement is an exercise in math, but does not result in a meaningful indicator of value. To understand the value of a company we need to look at far more than the company’s financial statements. Here are just a few examples of the many things that should be considered when valuing a closely held business.

• Is this a transferable business or an individual’s career? See Capital Valuation Group’s discussion from An Introduction to Business Valuation.
• Is the business dependent on any one customer for a large percentage of its total revenues?
• Does the business’s future look different from its past (typically true of closely held businesses)? If so, how?
• Does the business intend to increase/decrease its workforce?
• Does the business have contracts with its customers?
• Does the business have contracts with its suppliers?
• What is the competitive environment for the company?
• Is there pending legislation that might affect value?
• Does the business have facility and equipment capacity for growth without significant additional capital investment?
• Does the business have an overreliance on one or more key executives?
• Is there a competent, ongoing management team in place?
• Are there unionized labor issues?
• Are there potential or known environmental issues?
• Are adjustments needed to “normalize” earnings?

Once the requested documents and information have been provided, it generally takes 4 to 6 weeks to complete the appraisal. When the situation requires a faster turnaround, we work to prioritize the project and complete it within the client’s needed timeframe, whenever possible.

The cost depends on a number of circumstances specific to the business. Some of these include:

• The purpose of the valuation
• The complexity of the project
• The quality of financial and other information
• The availability of documents and information
• The complexity and dispersion of ownership and equity rights
• The end product—if the valuation will be used for internal planning purposes a calculation report, which could be a summary letter (with supporting schedules attached) will suffice and fees can be contained. If the valuation will be used for tax filing (estate or gift tax) or for testifying in court, a fully documented, written report must be completed, and this is more expensive.

We find it best to meet initially, typically at minimal or no cost, to gain an understanding of the purpose of the appraisal and the nature of your company. This allows us to make an informed proposal of expected fees.

The steps taken by Capital Valuation Group for a complete appraisal generally are as follows:

• Establish the purpose and parameters of the valuation
• Request documents and pertinent information about the business
• Review information received and analyze historical financial information
• Meet with owners/management to discuss historical trends and necessary normalizations for non-recurring or discretionary items, the future business plan and outlook, key risks and opportunities
• Research the current economic and industry trends
• Research our internal, as well as external, databases for mergers and acquisition data and/or guideline public companies
• Develop valuation model
• Determine the cost of equity and weighted average cost of capital to determine the present value of future economic benefits.
• Develop public company market analysis and comparable company transaction analysis as appropriate
• Reconcile the results of the various valuation methodologies and arrive at value for 100% of the business enterprise.
• Subtract debt to arrive at value for 100% of the equity
• Analyze the security (the specific block of equity being valued) for such factors as voting rights, preferential rights, transfer rights or restrictions. See Capital Valuation Group’s Block Ranking Chart (add link)
• Determine and apply appropriate premiums and/or discounts for control and marketability
• Review valuation methodologies and conclusions with client
• Report indications of value in appropriate written form
• If required, provide expert testimony to support our analysis and findings in deposition and/or trial.

We typically request information regarding:

• The company’s financial history and outlook
• Organizational and legal documents relating to the ownership of the company
• Prior transactions or valuations
• Legal agreements that affect operational control or enhance/restrict transferability
• The company’s facilities, suppliers, customers, employees, competitors
• The company’s intangible assets such as patents, copyrights, licenses, and customer lists
• Planned investment in capital expenditures
• Any contingent liabilities such as litigation and environmental issues.

We understand the sensitive nature of a company’s internal information and treat the information with the utmost confidentiality and care. Information related to our clients is never discussed or released to outside parties without prior authorization.

All sizes – most of our clients generally range from startup companies to companies with revenues in the $1 million to $20 million range.

Our firm has been valuing companies since 1974, so there are few industries that we’ve not analyzed and researched as part of our valuation process. That said, there are five industries in which we have continued to do a significant amount of valuation, including teaching at the industry’s conferences. These include the Artisan Cheese Industry, the Dairy Industry, the Dental Industry, the Plastics Industry and the Manufacturing/Integration Industry.

Yes. As part of our practice, we provide valuations of intangible assets. These include such things as goodwill, patents, trademarks, copyrights and other intangible assets at all stages of development.

While most accountants concentrate on accounting or tax work, a CPA probably can appraise your business. However, most accounting firms have one or two individuals, trained in accounting, to work on valuation projects, when they occur. Compare this to a firm that has a team of professionals with diverse training/backgrounds in accounting, law, finance and business and applying this training to the business appraisal exercise. Additionally, for purposes of divorce, other litigation or due diligence, the company’s CPA can be seen as too involved with the business to provide an independent opinion (conflict of interest). Additionally, some accountants do not have the necessary valuation training, credentials or experience to produce a credible analysis. See a summary of valuation designations and the requirements for obtaining each.