Business valuations are required for many reasons such as mergers & acquisitions, divorce, estate planning, bankruptcy and financial auditing. The valuation appraiser looks at a company’s profitability, risk, location, competition, history, applicable macro/micro economics, customers, assets, services offered, among other factors to determine an entity's value.
There is no singular way to determine what a business is worth which is why the retainment of an experienced business valuation expert is imperative when trying to apply a value to an entity.
A business owner may believe that their business is worth a lot more or less than the business valuation determined by the appraiser. Frequently, this is due to the fact that the business owner incorporates subjective, non-financial or emotional factors into the valuation that the potential interested party might not recognize as value.
The National Association of Valuators & Analysts ("NACVA"), requires three valuation approaches to be used in every summary valuation. The approaches that are applied and the rationale behind their usage is something that is discussed between the client and the certified valuation expert prior to beginning the valuation process.
There are several standards of value but, the most commonly used standards of value in divorce, business sales/acquisitions, shareholder dissent/oppression and estate planning are Fair Market Value and Fair Value.
NACVA sets the guidelines for valuing a business based upon the definitions put forth by the IRS http://www.irs.gov/publications/p561/ar02.html.
Fair Market Value ("FMV") is an expected price that the business is worth when it is under no compulsion to sell. FMV refers to the value an asset has in a market without the incorporation of "special value" factors.
On the other hand, the Fair Value ("FV") of a business incorporates special value factors into the valuation. For example, a buyer who wants the business for synergistic goals will offer an acquisition price that is based upon other subjective factors that go beyond the financials. A FV can result in a value that is higher or lower than the FMV.
The type of valuation that is needed is something that a valuation expert can help you decide. This consultation is offered free of charge by Anchor Business Valuations, LLC.
The process of valuing businesses is extremely complex and specialized. It is a specific track of learning and skill parallel, but separate, to an accountant. There are a limited few accrediting associations that grant certification in business valuations to individuals who have proven their analytic and technical abilities through intense training and real world experience. The National Association of Certified Valuators and Analysts ("NACVA") is one of the most well respected and known business valuation associations and the American Institute of Certified Public Accountants (“AICPA”) is one, if not the, most well respected and known accounting associations. NACVA's business valuation certification is only earned by professionals that have training, education, and experience in appraising companies. NACVA's CVA designation is the only valuation credential accredited by the National Commission for Certifying Agencies. The Accredited in Business Valuation (ABV ®) credential is granted exclusively by the AICPA to CPAs and qualified valuation professionals who demonstrate considerable expertise in valuation through their knowledge, skill, experience, and adherence to professional standards.
Per the IRS, a Qualified Appraiser is as follows:
A qualified appraiser is an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed.
In addition, the appraiser must make a declaration in the appraisal that, because of his or her background, experience, education, and membership in professional associations, he or she is qualified to make appraisals of the type of property being valued. The appraiser must complete the Declaration of Appraiser section on Form 8283, Section B. More than one appraiser may appraise the property, provided that each complies with the requirements, including signing the qualified appraisal and the Declaration of Appraiser section on Form 8283, Section B.
Business valuations are a necessary service that a business owner should request when a valuation of a business is needed. It is imperative that a valuation analyst is engaged as they can determine the value of a business based upon facts and experienced professional assumptions.
Please call Anchor for a free consultation regarding the value of your business.