Business Valuation involves determining the worth of a business enterprise or its ownership interest. Valuations serve various purposes –
Valuation for Financial Transactions: Such as buying or selling businesses, branches, licensing, franchise agreements, employee stock ownership plans, and partner/shareholder buy-ins or buyouts.
Valuation for Dispute Resolution: Covering business disputes, marital dissolution, bankruptcy, contractual disputes, owner disputes, employment disputes, and intellectual property disputes.
Valuation for Accounting and Legal Purposes: Including financial reporting, tax matters like corporate reorganizations, income tax, property tax, and wealth tax compliance, purchase price allocations, and charitable contributions.
Approaches
The most common approaches include Asset-Based, Market-Based, and Income-Based approaches. Often, a combination of these methods is used.
Asset-Based Approach
Adjusted net asset method is popular, starting with the net worth from the latest balance sheet and making adjustments to reflect realizable value. Reproduction or replacement cost may be used for intangible assets.
Market-Based Approach
Determines value based on prices at which similar assets/subjects are sold, employing methods like Guideline public company method and Comparable uncontrolled transactions method.
Income Approach
Value is based on anticipated future benefits, using methods like capitalization of benefits method and discounted future benefits method.
Premise of Valuation
This refers to the scenario under which valuation is conducted, such as a going concern basis or liquidation basis, significantly affecting the valuation outcome.
Standard of Value
Indicates the type of value used in a specific engagement, such as Fair market value, Fair value, Investment value, or intrinsic value.
Valuation Adjustments
Differences between the base value and the value of the subject interest may require adjustments, like discounts for lack of marketability or control.
Contents of Valuation Report
A comprehensive valuation report typically includes sections such as Letter of Transmittal, Introduction, Analysis of the subject entity, Valuation approaches and methods used, Valuation adjustments, Representation of the Valuer, Conclusion of value, and Qualifications of the Valuer.
Conclusion
The conclusion of value may be a single figure or a range depending on the purpose and standard of valuation.