What are the forms of Value? A number of different standards of value are often employed depending on the purpose and use of the appraisal. The following standards of value are the most common:
- Book Value is not really a standard of value. It is an accounting concept used to compute the difference between a company’s total assets and total liabilities. Due to the nature of the accounting process, book value would equal the value of a business only by coincidence. Intangible assets are usually not included in book value.
- Fair Market Value is defined as the price at which a business would change hands between a willing buyer and a willing seller when the former is under no compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. It is generally also understood that the parties have has the ability to buy or to sell and the transaction will be in cash or cash equivalents. In the United States, this value is the most widely recognized and accepted value related to business valuations.
- Fair Value is the statutory standard of value usually used in court cases involving dissenting shareholders and other similar types of litigation.
- Liquidation Value is the expected amount that could be obtained from the piecemeal sale of business assets on either an orderly or forced liquidation basis.
- Investment Value is the value to a specific buyer or investor often based on perceived synergies when the business is combined with another business. This standard of value is often used in merger and acquisitions.
What are the reasons for having a business appraised? There are many reasons why a business may need to be appraised. Here are the most common reasons. Click on Services for more detail.
- Buying or Selling a Business
- Partnership or Shareholder Agreements
- Marital Dissolutions (Divorce)
- Estate Planning for Gifts or Inheritance
- Family Limited Partnerships or Limited Liability Companies
- Employee Benefit Plans
- Litigation Issues involving Lost Profits or Economic Damages
- Dissenting & Oppressed Shareholder Litigation
- Mergers and Acquisitions
- Other Reasons
What is content generally included in a BAC report? A common BAC business appraisal report contains the following:
- An introduction, including the purpose and use, the standard of value, description of what is being appraised, and limiting conditions.
- An economic analysis and industry section.
- An analysis and description of the subject business including its history and future prospects.
- A financial analysis of the subject company.
- A financial forecast including assumptions used.
- A discussion of the valuation process and methods used including a detailed explanation of how each method utilized was applied.
- A description of any applicable discounts or premiums applied including justification for amounts selected.
- A reconciliation of indicated values developed from the various business appraisal methods utilized.
- The professional qualifications of the appraiser showing that the appraiser has the qualifications and experience necessary to perform business appraisals.
- Exhibits showing historical financial information, projections, and other information used in preparing the business appraisal.
If public companies are trading at price to earnings multiples of 10, 15, or higher, shouldn’t my business be valued based on the same multiples? Public companies with access to public markets are typically worth more than most closely held businesses. Choosing the correct multiples requires an in-depth analysis by a qualified business appraiser.
I am thinking about selling either part or all of my business. Do I have to get a business appraisal?We are often help people derive an appropriate asking price for their business without an appraisal. We also provide limited appraisals or computations for less cost than a full business appraisal.
Why can’t I have my CPA appraise my business? CPAs are great at what they do: help you prepare financial statements and tax returns, and assist with many financial decisions. However, very few CPAs have been trained to perform business valuations. Unless your CPA is accredited in business valuation, you should use a valuation expert to appraise your business. Also, your CPA can not be independent since they do your accounting work, even if they are accredited in business valuation. Most CPAs are not willing to appraise their own client’s business even if they are qualified to do so.
What is Revenue Ruling 59-60? Revenue Ruling 59-60, promulgated in 1959, addressed a desire by the Internal Revenue Service to set forth fundamental issues appraisers should consider when valuing a privately-owned business for estate and gift tax purposes. Rev. Rul. 59-60 is not a “how to”; rather it is an excellent discussion of eight broad factors the appraiser should take into account to reach a value conclusion.
Rev. Rul. 59-60, 1959-1 CB 237—IRC Sec. 2031
Sec. 2031—DEFINITION OF GROSS ESTATE 26 CFR 20.2031-2: Valuation of stocks and bonds. (Also Section 2512.) (Also Part II, Sections 811(k), 1005, Regulations 105, Section 81.10.)
Headnote: In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined. Revenue Ruling 54-77, C. B. 1954-1, 187, superseded.