If you are a business owner, your company will need to be appraised at some point. A business valuation is needed if you decide to sell or merge your business, add a business partner, create or update a buy-sell agreement, or devise or refine your estate plan. Since it is critical to plan ahead, here are a few basic business valuation terms to become familiarized with:
1. Fair market value: This is the price an asset, such as a business, would be passed from a willing and able buyer to a willing and able seller in an open and unrestricted market. Both parties would have reasonable knowledge of the facts.
2. Going concern value: This is common in buy-sell agreements and in divorce cases. The value of the company differs from the value of a liquidated company’s assets, as it’s an ongoing operation and has the ability to continue to earn a profit.
3. The asset (or cost) approach: This is one of the three common approaches appraisers use to value businesses. The appraiser must estimate the value by adjusting the asset value and the liabilities to the air market value. This approach is commonly used for valuations of not-for-profit organizations, asset-intensive companies or manufacturing companies.
4. The income approach: This method allows investors or potential buyers to estimate the value of the property based on the income produced and any anticipated economic benefits.
5. The market approach: An appraiser compares the selling price of similar businesses, interests or intangible assets that have been already been sold in the market.
6. Valuation premium: This refers to the excess in value a buyer estimates for a company or asset compared to its peers in the same industry.
7. Valuation discount: This refers to the deficiency in value a buyer estimates for a company or asset compared to its peers in the same industry.
8. Investment value: This is the value of an asset, such as a business, that is perceived by its owner based off their expectations and requirements.
