A business valuation sounds complicated, but the concept is quite simple. A business valuation is a process of analyzing relevant information in order to develop an informed value for an asset. The asset could be an entire business or an interest in a business. It could be the value of a liability too, such as a promissory note.
The core of a valuation analysis is to determine the expected future cash flows of the business and the amount of risk in achieving those cash flows. A business valuation reviews all pertinent operational and financial information when analyzing the financial benefits stream and the risk factors involved.
Yes. In our experience, most companies want a fair market value appraisal. This means the company wants to see what the value is if the company were sold on the market where the buyer and seller had access to the necessary information to reach an “arms-length” agreement.
There are generally two other types of business valuation services we provide including investment value and fair value reports. Investment value is the value to a particular owner, and we typically perform these for potential buyers of businesses. Fair value reports are for litigation/marital dissolution purposes and are consistent with California statutes.
Yes. We issue detailed valuation opinion reports if the valuation will be submitted to a tax authority or a court. If only our client will be relying on the valuation report, we’ll provide a restricted valuation opinion report. This is the same level of analysis as the detailed report, with a shorter written report and a lower cost.
We also perform valuation consulting engagements where we provide our conclusions in an Executive Summary format. These are calculations of value estimates rather than opinions of value. We can perform these engagements to get a preliminary idea of value before the client invests in an opinion report. These are typically for transaction pricing, marital dissolution settlements, and litigation settlements.
Many people start with valuation rules of thumb, usually multiples of revenue or earnings. These don’t consider the specifics of a company. By relying on a rule of thumb, you open yourself up to risk. There’s the risk of leaving money on the table. Or, overpricing the company and not being able to sell it. By getting a business valuation, you’ve hired an expert to consider your business’s specific profile and provide an informed opinion of value.
We can’t tell you how many times we’ve seen business owners decide they don’t want to spend a few thousand dollars on a valuation, then end up selling the business for hundreds of thousand dollars less than they could’ve gotten had they had a more informed idea of value.
Valuation fees run in a wide range, and it depends on the purpose of the valuation and the type of report. The more detail needed, the more it will likely cost. For a business with sales up to around $20 million, valuation opinions generally run between $6,500 and $15,000. For calculations of value estimates, the appraiser relies more on the company management team for guidance on business operations and projections. Therefore, you will often see valuation estimates priced from $4,000 to $6,000.
Our partners are accredited to perform business valuations by the American Society of Appraisers (ASA) and the American Institute of Certified Public Accountants (AICPA). The business valuation credentialing process involves coursework, exams, and certification that we’ve each performed thousands of hours of business valuation work.
Since we’re credentialed by two of the leading business valuation bodies, our reports are in compliance with major standards, including the Uniform Standards of Professional Appraisal Practice (USPAP) and the AICPA’s Statement on Standards of Valuation Services No. 1 (SSVS 1).
There are many valuation experts around, and there are many people who occasionally provide valuations but do not focus full-time on it. It’s advisable to get a valuation from an accredited business valuation professional. If the valuation’s opinion of value is off by 10% and the business value was $10 million, that’s a $1 million miscalculation. In comparison to a few thousand dollars spent on a valuation from a qualified valuer, it is worth it to get an accurate valuation.
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