Business Law 101 / BUSINESS VALUATION

By Albert L. Kelley

What is the value of your business? That is a difficult question and a confusing answer. Business valuation is a combination of an art and a science. While many may tell you that there are quick and easy formulas to obtain a value, that is simply not the case. To obtain an accurate value for a business, the employment of a professional business appraiser is highly recommended. While there are real estate and business brokers who may provide an estimated value for a sale, unless they have specific training in valuation (and preferably an accounting background), their estimate is just that- an estimate. It will likely not stand up in court if there is a challenge to it. It is recommended that an appraisal only be done by a Certified Business Appraiser, Master Certified Business Appraiser or Accredited Senior Appraiser and that the appraiser be a member of Institute of Business Appraisers or American Society of Appraisers.

There are several types of business valuations. First is the Replacement Cost Analysis. Using this valuation method, the appraiser can tell you how much it would cost to replace the assets of the business. The assets can include just the plant, property and equipment (PP&E) or it can include all the assets, including intellectual property such as trademarks, copyrights, logos and client lists. This value does not represent the true value of the business; it could easily be much higher, or much lower, than the true value based on condition of equipment, reputation of the business, length of time the business has been in operation and experience of the owners. This valuation method does not take into consideration such intangibles as location, environment, and legal issues.

Second is the Asset Appraisal Analysis. This value comes from a determination of how much the company could sell all assets for if the company was liquidated. This usually produces a lower value for the company as an operating company is usually more valuable than one in liquidation.

Third is a Discounted Cash Flow Analysis. This method calculates what portion of the business’ cash flow is needed to pay the debts of the business to determine a return of equity. This return of equity is then calculated over a period of time to obtain a long range return. From this, the appraiser can calculate a present cash value for the long term return.

Fourth is a Comparable Public Company Analysis. The value of a publicly traded company is easily calculated on a day to day basis (actually minute to minute) by following the sales on the stock exchange. When a private company has similar attributes to a publicly traded company, an appraiser may be able to calculate the value of the private company by comparing it to the value of the publicly traded company.

Fifth is Comparable Transaction Analysis. This method simply compares the company to that of a similar private company that has been recently sold.

Each of the above valuation methods gives a partial picture of the value of a business. None provide a true value. The appraiser will want to complete as many of the above valuation methods as possible and then compare those values to obtain a definitive fair market value (Some values must be weighted based on their accuracies or upon the specific requirements of the business). A valuation report done properly by a trained professional should stand up in later litigation regarding the value of the business.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” “Basics of Florida’s Small Claims Court” and “Basics of Florida’s Landlord-Tenant Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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