What’s My Business Worth?

There’s a joke among CPAs that the answer to any question is – it depends.  Similarly, when I’m asked the question, what’s my business worth, the answer is usually – it depends.

Valuations are used for a variety of purposes and the purpose will affect the value.  The variable making the most difference is the use or lack of discounts.  For instance, in matters such as divorce and shareholder disputes, the most common valuation standard of value is “fair value” in which discounts are not applicable.  For matters relating to the IRS, such as estate or gift tax, the standard of value is “fair market value” and frequently involves discounts for lack of marketability and/or lack of control for a closely-held company.

At this point, it’s worth mentioning that fair market value for an estate and gift valuation is not the same thing as fair market value in a mergers and acquisitions transactions.  The former is based on theory and studies and the later is determined by what someone is willing to pay.

A client once asked me, why would I want the value of my business discounted?  In the case of an estate or gift valuation, discounts can significantly affect the value being taxes.  Accordingly, any discounts should be well documented and explained in the appraiser/valuator’s detailed valuation report.

If you’re consulting with a business appraiser before marketing your business for sale, there’s a very good chance the value estimate you receive will not equal what the business eventually sells for.  That’s because the appraiser is making their best estimate based on the data available to them to try and predict what any given buyer might pay.  A strategic buyer, for instance, might be willing to pay more than a private equity group.

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