One of the most often asked questions business owners ask us is, “What is my business worth?” It is then usually followed quickly by two follow up questions which are, “How fast can you figure it out?” and “What’s it going to cost me?”
Unfortunately, the answer to these questions is the age old answer, “It depends.” Several factors it depends on are:
- who the intended users of the valuation report are
- what the purpose is for having the valuation done
- what level of interest is being valued
- a host of other factors
Who the intended users of the valuation report are is a critical determinant of the type of report you will choose. For instance, in valuation matters that may ultimately involve litigation or review by the Internal Revenue Service, it is most appropriate to have an Appraisal Report completed which conforms to the Uniform Standards of Professional Appraisal Practice or “USPAP”. USPAP outlines the criteria and requirements involved in a credible business appraisal. Some of these requirements include an analysis of the industry the business operates in, an analysis of the general economy, an analysis of the past, present, and future operations of the business, and detail regarding shareholder agreements and corporate documents. Depending on the complexity of the assignment, this analysis could take weeks or even months depending on when all of the relevant data for the analysis can be gathered from the subject company. These factors lead to an assignment taking longer to complete and to greater expense.
It also depends on the purpose for which the valuation is being done and the interest being valued. For instance, if gifting minority shares to a valued employee, minority discounts may be applied. This makes the assignment more difficult than simply dividing a value arrived at by the number of shares in the company. However, it is most often worth the extra effort because it will lead to the majority owner saving money on gift taxes.
For the business owner that simply is trying to make some estate planning decisions and wants to factor in the value of their business in the market or wants to sell the tangible and intangible assets of their business, we can also perform a Broker’s Opinion of Value since we are also business brokers dealing with business transactions everyday. This is a less expensive and less time consuming option than having an Appraisal Report prepared but should only be used in certain circumstances.
Of all the information business owners hear regarding valuation “multiples” or “capitalization factors”, we caution business owners not to draw a conclusion about the value of their business from those touting simple formulas. We often hear folks say, “I heard my business should be worth “x” times my cash flow.” The question is, How are you defining cash flow? Are you going to use EBIT? EBITDA? Net Income? SDE? And even if you do agree on a certain measure, will it be adjusted for non-cash charges such as depreciation and amortization?
When valuing one of the greatest assets in your financial portfolio, make sure you seek competent counsel regarding the value of your business. Seek advice from an Accredited Senior Appraiser (ASA) in business valuation or another credentialed business valuation specialist.