How a Business is Valued

Valuing a business or ownership interest in a business is a very complex process.  Much thought and analysis must go into completing a valuation, if the appropriate conclusion is to be reached.  The skills and expertise of a business valuator play a critical role in determining a value conclusion. 

Three commonly accepted approaches to value are asset, income, and market.  The choice of which approach to adopt depends on the specific facts and circumstances of each valuation.  Each approach utilizes various valuation methodologies.  The approaches and methods include:

Income Approach   |   Market Approach   |   Asset Approach   |   Factors to Consider 

Factors to Consider When Completing a Business Valuation

Various quantitative and qualitative factors must be researched and analyzed when performing a valuation of a business or ownership interest in a business.  Such steps are essential for a business valuator to arrive at an appropriate conclusion of value.     

The IRS provided guidance on what a business valuation submitted for estate and gift tax purposes should include in Revenue Ruling (RR) 59-60.  RR 59-60 states the following factors are fundamental to the valuation of a closely held business and require careful analysis:  

·        The nature of the business and the history of the enterprise from its inception

·        The economic outlook in general and the condition and outlook of the specific industry in particular

·        The book value of the stock and the financial condition of the business

·         The earning capacity of the company

·         The dividend-paying capacity of the company

·         Whether or not the enterprise has goodwill or other intangible value

·         Sales of the stock and the size of the block of stock to be valued

·        The market price of stocks of corporations engaged in the same or similar lines of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter

Additional factors to consider include:

·         Capabilities of the management team

·         Competitive position and environment

·         Product diversity

·         Supplier mix

·         Customer mix

·        Condition of fixed assets and the need for future capital expenditures

·         Numerous others