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How Much Is Your Business Worth?
Many times we, as CPAs, are called upon to solve this puzzle. As the accountants for the practice, we are well equipped to answer this question. Beyond merely satisfying the physician’s curiosity, we have also valued businesses in matters relating to:
- Mergers and Acquisitions
- Shareholder Transactions
- Sales and Divestitures
- Capital Infusions
- Buy/Sell Agreements
- Expert Testimony/Litigation Support
- Estate Planning & Taxation
- Charitable Contributions
- Purchase Price Allocations
- Gift Taxes
While the above list is not all-inclusive, it represents the most common reasons for valuing a closely held business.
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.
Typically, a business has two types of assets, that may require a 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 practice is goodwill.
While the definition of goodwill is somewhat elusive, the following are several significant factorsdominant in the determination of goodwill:
- Anticipated Future Earnings
- Level of Competition
- Economic Strengths
- Price Charged for Services of Products (Compared to Others)
- Location of Business
- Employees of the Business
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.
For more information, contact James B. Hankins, Jr., CPA/ABV, CVA, BVAL, Business Valuation & Litigation Support Shareholder, at 412.281.4323 or at jhankins@alpern.com.
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