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DETERMINING THE VALUE OF A BUSINESS

At some point in the life of every business, either the owners of the business or other third parties are faced with the prospect of trying to provide a valuation estimate either for the entire business or a fractional interest therein. 

Unfortunately, there is no universally agreed valuation formula that can produce an exact accepted value in all circumstances.

Instead, most courts and appraisers are guided by the Uniform Standards of Professional Appraisal Practice which recognize three approaches to valuation: The Income Approach, the Market Approach, and the Asset Approach.

The Income Approach looks at the amount of money a business takes in on a yearly or average basis and attempts to value this as a future income stream. Here a calculation would be made as to that amount of money which would need to be invested at a particular target investment return rate to generate the same income that the business is generating. This is the most frequently used method of valuation because all of the information needed to conduct the analysis can be found in standard company financial records and in reference to return rates readily available from third parties.

The Market approach focuses on the historic and comparison value of other similar businesses. In this approach, research is made into other sales of similar businesses with similar clientele to establish the most relevant comparables. While this approach should theoretically produce more accurate real-world valuations, there are often disagreements as to how similar other businesses and their clients actually are to the one being evaluated.

The third approach focuses on valuation of the Actual Assets of the business. This approach is also likened to establishing a liquidation valuation for a company. While some companies are really worth little more than their assets and inventories, other companies have substantial value in intangibles that can be hard to value. 

A host of other issues can be utilized in a final valuation including marketability discounts for companies that are hard to sell; control discounts for less than a 51% ownership, and differences as to risk and quality premiums which can apply to certain types of businesses and circumstances.

In many situations, one or more of these approaches is examined by an expert business valuator who can research the details of a specific company and provide a written report with analysis that can be examined or opposed by other experts.

In the litigation context, these experts are often critical to a final result which if pushed to trial will ultimately be decided by a judge, jury, or private resolution mechanism such as arbitration. 

These issues should further be discussed and analyzed by a civil litigation attorney with substantial experience in these areas.

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