Who hasn’t heard of Coca Cola? This universal company has beverage prices with a wide retail bell curve; you could pay 50 cents from a grocery store, or $4 dollars at a restaurant. The perceived value in the venues makes all the price difference. So, how can a business pay twenty-five cents for something, and then sell it for fifty cents or four dollars?  Simply – the where; and the who. Let’s say you sell a Coca Cola for $2.50 that costs you twenty-five cents? How do you defend the premium pricing if challenged, and how much more revenue could you obtain a year from a 10 cent premium on each sale? Let’s say these are rhetorical questions.

 

Your business is much more complicated than selling a Coca Cola, or buying a Coca Cola, for that matter. Businesses are valued for many reasons: estate planning, a transaction, a partner or shareholder dispute, a settlement, or say an employee stock ownership plan. The most common valuation is transaction valuation – sale of a business interest.

Let’s say you look at your balance sheet and it reports assets of $4 million. Is that the true value of your business? Any CPA or business valuator will tell you that it’s not the true value of your business. Business valuation has a plethora of factors such as normalized earnings, strategic marketplace positioning, goodwill, and fair market valuations of assets, e.g. equipment, real estate, or patents.

 

Rules of thumb in business valuation work for estimates, but should never be used for the above, such as estate planning or a transaction. For instance, in estate planning, you need a defensible written report for the IRS if audited. This report need detail how the valuation was computed. If your valuation is not satisfactory to the IRS, its department could reassess the value of your business (always a higher valuation) and assess additional taxes. Or say in a transaction valuation, there are specific business valuation components. If you sell your business for less than fair market value, you could be assessed a gift tax on the transaction from the IRS. This is a tax compliance issue many sellers are unaware of.

 

Your benefit from understanding the components of value: marketplace niche values, strategic values, intangible fair market values, goodwill values, and other related metrics – will help you optimize a business interest value and ultimately the cash you receive at settlement. You need a professional valuator to publish these valuing adding components; and to bring them to your attention, and the marketplace’s attention.

 

Your business is probably one of your most significant assets. Omitting a professional valuator/advisor when necessary is unadvisable, not to mention the risk with compliance factors for estate planning and gifting. If your business is worth selling, it’s worth appraising with a professional valuator.

 

Summary:

 

If you are selling a business interest, planning your estate, or involved in other activities that have you talking business values, do this. First, call your CPA for a referral to a professional valuator; your CPA may even be certified in business valuation. Have a no obligation conversation with that professional valuator to obtain the advice that is in your best interest. Then listen and heed that business valuators advice.