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How To Value Your Business
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Business New Haven
11/10/2003
By: Melissa Nicefaro
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If you're looking to sell or buy a business, it will be well worth a trip to a certified accountant who can help place a value on the business.
There is a wide array of factors to consider when estimating the common stock value of any business entity. These factors vary for each valuation depending on the unique circumstances of the business enterprise and general economic conditions that exist at the time of the valuation.
The most commonly used valuation guidelines are derived from the Internal Revenue Service's "Revenue Ruling 59-60," which says that in valuing the stock of closely held businesses, the following factors are fundamental and worthy of careful consideration:
o The nature of the business and the history of the enterprise.
o The economic outlook in general and the condition and outlook of the specific industry.
o The book value of the stock and the financial condition of the business.
o The earnings capacity of the company.
o Its dividend-paying capacity.
o Whether the enterprise has good will or other intangible value.
o Sale of the stock and the size of the block of stock to be valued.
o The market price of stock of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the counter.
If a business owner seeks a valuation to sell the business, there are several specific things to focus on, beginning with examining at least five years of history and analysis of financial statements. A qualified accountant would look for the business' strengths and weaknesses to see what trends are impacting its prospects.
Forecasts and projections are helpful in negotiating a fair price for a sale, as they can illustrate what the company is likely to be worth over the next several years.
Valuations should be based not only on history if, for example, the company is experiencing a growth spurt. If the company is in a slump, on the other hand, an accurate valuation would not be based solely on projections.
If the company's sales or earnings are slumping, its good will and being well established in the community can add value to a prospective sale price. A business may be in a slump because its entire industry is in a slump. Or, the company may be poorly managed.
When valuing a business, it is important to analyze the company itself, but also to step back and look at its industry. Value must be kept in perspective to the industry and the regional economy to determine if the economy itself could support future growth in the business.
In addition to possible sale of a company, valuation is also necessary if an owner is going through a divorce. In the case of divorce, the value of a business may have an impact on alimony, child support or property settlement. Another reason for valuation could be an owner's retirement, or possible partnership.
Someone selling a business would certainly benefit from a valuation, but if you're interested in buying a business, it behooves you to have the business valued. Depending on the result of the valuation, a buyer could employ some basic rules of thumb, or hire a professional to do it. If the sale is expected to be a substantial amount, a certified professional should be involved.
As a buyer, keep in mind that the seller is likely performing his or her own valuation, too. In dressing the business for sale, the owner almost certainly will seek to identify - and quantify - strengths and weaknesses by analyzing financial statements, and develop a plan to enhance the company's value.
In any event, standards should be followed, either those set by the Internal Revenue Service or accounting associations, the latter of which tend to be more stringent.
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