Business valuations determinate a value for a business (or a certain portion of a business). The more common reasons for obtaining a business valuation are:
- Shareholder buyouts / disputes
- Family law / Marital disputes
- Income tax and estate planning transactions
- Purchase and sale of a business
- Shareholder transactions
- Employee share ownership plans and stock options
- Joint venture and partnership disputes
- Income tax litigation
- Goodwill impairment testing
- Litigation support
In conducting business valuation engagements we quantify the value of a business in one of two general contexts.
Notional Market Valuations
Notional market valuations occur when a business valuation needs to be performed without exposing the business for sale in the open market (sort of like appraising the value of a house without putting it up for sale). In a notional context a business valuation is performed theoretically and can be determined based on a current date or some significant date in the past.
Open Market Transactions
Open market transactions are the actual acquisition or divesture (i.e. sale) of a business that is completed after a business has been exposed for sale to the open market. In this context, the objective of a business valuation is to determine a range of prices to transact. In an open market, the parties to a transaction perform their own research and analysis, with the help of financial professionals such as business valuators, to determine the price at which they wish to transact. Negotiation then takes place to arrive at the ultimate transaction price.
Price in the Open Market vs. Value in a Notional Context
It is important to recognize that there may be significant differences between the price a business sells for in the open market and the conclusion arrived at in a notional valuation. These differences primarily relate to:
- Information availability, including negotiating abilities of the parties
- Emotional considerations that may override objective analysis and evidence
- Purchasers or sellers may be compelled to act and therefore not transact at a fair value for the business
- Liquidity (i.e. how easy or difficult it is to liquidate a business)
- All potential purchasers may not be identifiable
- Risk and return assessment
- The valuation of controlling interest as compared to a minority interest
- The price may not be all cash and earn-outs or other structures may be relied upon to bridge the price “gap” between the vendor and the purchaser
If you require a business valuation, please do not hesitate to contact us to discuss your situation further.
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