Business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing to pay or receive to effect a sale of the business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.[1]
Specialized business valuation credentials include the Chartered Business Valuator (CBV) offered by the CBV Institute, ASA and CEIV from the American Society of Appraisers, plus the CVA and CBA by the National Association of Certified Valuators and Analysts; these professionals may be known as business valuators.
In some cases, the court would appoint a forensic accountant as the joint-expert doing the business valuation. Here, attorneys should always be prepared to have their expert's report withstand the scrutiny of cross-examination and criticism.[2]
Business valuation takes a different perspective as compared to stock valuation,
[3]
which is about calculating theoretical values of listed companies and their stocks, for the purposes of share trading and investment management.
This distinction derives mainly from the use of the results: stock investors intend to profit from price movement, whereas a business owner is focused on the enterprise as a total, going concern.
A second distinction is re corporate finance: when two corporates are involved, the valuation and transaction is within the realm of "mergers and acquisitions", and is managed by an investment bank, whereas in other contexts, the valuation and subsequent transactions are generally handled by a business valuator and business broker respectively.
Estimates of business value[edit]
The evidence on the market value of specific businesses varies widely, largely depending on reported market transactions in the equity of the firm. A fraction of businesses are publicly traded, meaning that their equity can be purchased and sold by investors in stock markets available to the general public. Publicly traded companies on major stock markets have an easily calculated market capitalization that is a direct estimate of the market value of the firm's equity. Some publicly traded firms have relatively few recorded trades (including many firms traded over the counter or in pink sheets). A far larger number of firms are privately held. Normally, equity interests in these firms (which include corporations, partnerships, limited-liability companies, and some other organizational forms) are traded privately, and often irregularly. As a result, previous transactions provide limited evidence as to the current value of a private company primarily because business value changes over time, and the share price is associated with considerable uncertainty due to limited market exposure and high transaction costs.
A number of stock market indicators in the United States and other countries provide an indication of the market value of publicly traded firms. The Survey of Consumer Finance in the U.S. also includes an estimate of household ownership of stocks, including indirect ownership through mutual funds.[4] The 2004 and 2007 SCF indicate a growing trend in stock ownership, with 51% of households indicating a direct or indirect ownership of stocks, with the majority of those respondents indicating indirect ownership through mutual funds. Few indications are available on the value of privately held firms. Anderson (2009) recently estimated the market value of U.S. privately held and publicly traded firms, using Internal Revenue Service and SCF data.[5] He estimates that privately held firms produced more income for investors, and had more value than publicly held firms, in 2004.