Did you know that businesses in the USA alone spend billions of dollars on appraisals every year? They need to do so for a diverse number of reasons: getting a loan against business assets, selling or buying a business, to obtain insurance or in cases of legal dispute.
It would seem at first that the financial statements created by accountants should reveal the values of business assets and the entire company. Unfortunately, every one who has ever tried to make a value assessment from accounting statements knows, even the best GAAP compliant financials fail to provide realistic picture of business value.
To make matters even more interesting, business value is truly in the eyes of the beholder. No one number captures this elusive concept. In fact, business value depends upon the purpose of valuation.
For example, your business real or personal property may have an insurable value or the amount of money needed to replace it in case of a total loss. On the other hand, a bank lending against the property would want a different number that is closer to the selling price one can get at a liquidation sale. If you are the property owner, you would most likely try to sell the building at a number higher than a typical buyer is willing to put up.
Every one of these value numbers is different yet all are quite real. The difference is the purpose of valuation. What is valuable to a business owner is not necessarily a factor to the tax man. The amount of customer loyalty your business commands is of little interest to the bank loan officer who must be concerned with the company’s ability to repay the loan. So business value depends on your point of view.
If you are valuing a business, you need to have a special insight to come up with an acceptable answer. The reason is that business appraisals are usually done to address some type of dispute or conflict. So your business appraisal will likely be scrutinized by skeptics looking to tear it apart. Consider just some of the typical scenarios calling for business valuation:
- Business owners want to minimize gift or estate taxes
- Tax authorities seek to collect the taxes due in full measure
- Business buyers want to pay the least amount possible
- Business sellers want to get the top price
The list goes on.
Even so, the need for business valuation pops up in just about any type of transaction. Both sides must settle the question of value before they close a deal. Knowing one type of value, e.g. how to price your products and services, does not make you an expert in valuing the entire company. A whole new set of assumptions and value drivers comes into play and you need to know how to deal with this complexity.
While pricing assets is a game business people are good at, making an error of judgment when valuing the company could cost you a lot of money. The takeaway is don’t underestimate the challenge of business valuation, invest time and effort to understand the fundamentals involved and get expert help if needed.