Business valuations generally arise in the context of one or more of the following three categories: (1) transactions, (2) litigation, (3) taxes (or estate planning). Transaction appraisals include acquisitions, mergers, leveraged buy-outs, initial public offerings, ESOPs, buy-sell agreements, and many other engagements.
Valuations may arise in a litigation context in connection with marital dissolution, bankruptcy, breach of contract, dissenting shareholder and minority oppression cases, economic damages computations, and other cases. Valuations may also be conducted for tax reasons, including gift and estate taxes, estate planning, family limited partnerships, and other tax-related reasons.
H. Edwin Gray, CPA/ABV, CVA, CFE is accredited in business valuations. That means you are working with a CPA with specialized valuation training and experience. Valuation of a closely held business combines financial and economic analysis into a relevant and quantifiable representation of value. The valuation process should translate complex business valuation theory and terminology into a clear and understandable appraisal.
Who Needs a Business Valuation?
If you fit any of the following profiles, you need to initiate a business valuation:
• You have been solicited by your competition or a third party about your willingness to sell your business
• You know it is time to begin serious estate planning
• Your strategic business plan indicates that you are to identify, evaluate, and approach targets for acquisition
• You are now, or likely will be, involved in an equitable distribution matter, such as a divorce
Business Valuation Theory
What is meant by “Fair Market Value” and what is a "Standard of Value"?
These are fundamental valuation concepts.
Fair Market Value is the most common standard of value for ownership of a company. A frequently relied upon definition of "Fair Market Value" comes from the Internal Revenue Service's Regulation 20.2031-1(b).
That definition is that the Fair Market Value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.
Fair Market Value is the price at which a hypothetical sale transaction will occur. It is properly termed a "hypothetical" sale transaction for two significant reasons. First, the sale transaction is an attempt to simulate a "market" and, as such, does not involve a real buyer or a real seller. Second, the sale transaction assumes and/or implies a number of underlying precedent conditions which may or may not be present in an actual sale.
Hence, the business appraiser's Fair Market Value may or may not be the sale price that an actual sale transaction would derive.
The "FMV" hypothetical sale transaction has the following assumptions and/or implications:
• that the transaction is cash or a cash-equivalent price at existing economic conditions,
• that the parties are adequately informed of all relevant facts,
• that there is no compulsion existing upon either party to consummate the transaction,
• that, when appropriate, a covenant not to compete is included in the price,
• that the buyer has both the ability to buy and the willingness to buy,
• that a market composed of potential buyers and sellers of similar businesses exists,
• that a particular buyer having a specific motive is not contemplated, and
• that a reasonable amount of time is contemplated to achieve the sale price.
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