In the US the Internal Revenue Service has laid out the expectations for what the tax authorities look for in business valuations. Here is the list:
- The nature of the business and its history
- The book value of the company stock and its financial condition
- The dividend paying ability of the firm
- The presence of goodwill and other intangible assets
- Sales of company stock, sizes of stock blocks to be valued
- Market price of stock of companies in the same line of business whose stock trades freely on the open market
Most professional business appraisers pay close attention to the above requirements when preparing their valuations. The points are given some attention in the business valuation report that follows.
For privately owned companies, some of the points are less relevant, e.g. the dividend paying capacity. This is because private companies like to avoid the taxation burden that paying dividends brings.
In this case, the tax authorities are typically interested in the business cash flow outlook. So a realistic earnings forecast is useful both for your income-based business valuation as well as meeting the level of transparency expected of a well thought out business appraisal.