Warren Buffet was quoted in a shareholder meeting for Berkshire Hathaway back in 2012:
“If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory. Rather, business schools should be encouraging students to learn the boring, but critically important, discipline of business valuation.”
Business owners who have expressed an interest in having their company valued have also implicitly recognized that there is value in understanding how to value their business. That said, it is essential for their advisors to have a good working knowledge of the components that make up their client’s valuation report.
A business valuation report can provide business owners and their advisors with much more than just a “valuation number.” For example, it can provide clients with important insights into different measures of business value as well as comparisons of the subject’s key financial benchmarks with the industry cohort. In addition, business owners and their advisors can benefit from gaining an understanding of the mechanics of business valuation and using this knowledge to proactively manage or build value over the short and long term.
Defining Key Terms is Critical
The most common business valuation scenario can be boiled down to the following:
The determination of fair market value on a going concern basis in the 100% controlling interest in the firm’s common stock or assets.
In short, what is the value of the entire company (assets or stock) “on the open market” to the typical or most likely buyer for the given business?
This scenario will apply, for example, if there are:
1) Plans to buy or sell a business
2) Reasons to obtain an SBA loan or seek out other financing
3) Requirements to file for estate/gift tax purposes.
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