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How Much Is
My Business Worth? |
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By: Joel
B. Charkatz, CPA, CVA, CFE |
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Many times we, as CPAs, are called upon to solve
this puzzle. As the accountants for the business,
we are well equipped to answer this question. Beyond
merely satisfying the owner's curiosity, we have
also valued businesses in matters relating to: |
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Mergers and Acquisitions |
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Expert Testimony
/ Litigation Support |
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Shareholder Transactions |
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Estate Planning & Taxation |
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Sales and Divestitures |
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Charitable Contributions |
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Capital Infusions |
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Purchase Price Allocations |
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Buy-Sell Agreements |
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Gift Taxes |
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While the above list is not all-inclusive, it represents
the most common reasons for valuing a closely-held
business. |
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When valuing a business, typically fair market
value is the goal. This value is defined as the price
at which property would change hands between a willing
buyer and a willing seller, when the former is not
under any compulsion to buy and the latter is not
under any compulsion to sell, both parties having
reasonable knowledge of relevant facts. This definition
was determined by the Internal Revenue Service in
1959 and is still considered the most informative
and eloquent definition. |
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Typically, a business has two types of assets
which require determination of value. Tangible assets,
such as equipment, buildings, vehicles, etc., if
material to the valuation, should be appraised by
an independent appraiser. Another tangible asset,
accounts receivable, can usually be valued by applying
historical collection ratios. The second type of
business assets are intangible assets. Often, the
most valuable intangible asset of a business is goodwill.
While the definition of goodwill is somewhat elusive,
the following are several significant factors dominant
in the determination of goodwill: |
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Anticipated
Future Earnings |
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Level of Competition |
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Economic Strengths |
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Price Charged for Services
of Products (Compared to Others) |
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Location of Business |
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Employees of the Business |
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| Various premises of value must be considered when
performing a valuation of the business. Is the business
to be valued based upon a going concern concept? Or
is a liquidation value the goal of the valuation analyst?
Is a controlling interest in the business being valued
or a minority interest? To what degree is there a ready
market for the business, or interest in the business
that is being valued? These premises of value are assumptions
as to the set of circumstances under which the valuation
will occur. The premise of value will define the conditions
under which a buyer and a seller will exchange the
subject assets, properties, or business interest. |
| The purpose of the valuation may also affect the
determination of value. A valuation for a purchase
or sale is subject to all the forces that affect supply
and demand, including all relevant economic factors
prevalent at the time and other factors which influence
the market for the business or practice in question.
However, a valuation of a partial interest in a business
or practice may or may not determine a value which
represents the proportionate share of the total entity.
In other words, depending upon the circumstances, the
sum of the values of the various parts taken individually
may or may not add up to the value of the business
or practice if it were valued as one total entity.
For example, minority interests are typically worth
something less than their proportionate share of the
total entity value. |
| Although the standard of value for estate, gift and
inheritance taxes is fair market value, there can be
many differences between a valuation for tax purposes
and a valuation for a sale of a business or for other
purposes. For example, estate and gift tax valuations
are based on the value of a business to a hypothetical
buyer who would have no special synergy with, or relationship
to, the seller. In a tax valuation, the fact that a
seller might be able to command a higher price because
of some feature that might be uniquely valuable to
a particular buyer would not be considered. |
| We, at KAWG&F, will be happy to assist you in determining
the value of your business. Several of our shareholders
have achieved the designation of Certified Valuation
Analyst (CVA) from the National Association of Certified
Valuation Analysts (NACVA). As such, they are recognized
experts in the field of valuation, and are qualified
to assist you in this area. |
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| For additional information, please contact
us. |
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