Business Valuation As It Relates To Business Sale Price Calculation & Working Capital

There are many circumstances where a formal Business Valuation is required. Business valuations are geographically influenced. A Business Valuation in Houston Texas, might create a different value than a similar business in New York. Business Valuations are also known as Business Appraisals. As you might imagine, Business Appraisals are a complicated business. There are different kinds of appraisals for different circumstances.

Here is a summary:

1) Business Appraisal “Calculation of Value”

This valuation is often used in Buying a Business or Selling a business. The premise is that the buyer has no formal ties to the business and the transaction is an arms-length transaction for the sale of 100% of the business. This valuation is generally viewed as a purely financial opinion of market value and makes no assumptions about how a specific buyer might value the business.

2) Estate Plan Valuation

This is a valuation done for business owners who have the business inside their estate and required the appraisal for tax planning issues.

3) Buy/Sell Partner Appraisal

This is often used when one business partner is buying out another business partner.

4) ESOP Appraisal

This is used when the company is installing an ESOP (Employee Stock Ownership Plan) so that the employee-owner has a way to understand the value of their business ownership interests.

5) Divorce Valuation

Self-explanatory and similar in many ways to the Partner buyout valuation listed above.

6) Personal Goodwill Valuation

Sometimes used in a business transaction where an owner is personally involved and critical to the business. For instance, a world renown heart transplant surgeon likely has a lot of personal goodwill built up because people seek out that surgeon INDIVIDUALLY. If that surgeon left the business it’s likely many patients would not contact the business.

7) Minority Interest Valuation

This is a valuation used to assess the value of an interest in a business where the minority ownership is not liquid. For instance, if I own shares of IBM I call my broker and have the shares sold at a published price in 5 minutes. However, if I own 10% of XYZ, INC that is not a publicly traded company with 90% owned by my boss Mary, then I would need to try to find someone to buy my 10%. In this case, since Mary owns 90% of the company and is my boss, my 10% is probably not worth 1/10 of 100% value of the company. This valuation helps determine what your 10% is really worth.

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