Many business owners believe the value of their business is net profit, or gross sales, multiplied by an industry rule of thumb. This is simply not the case. In fact, the application of an industry rule of thumb formula often results in a value determination that differs greatly from the actual value that could be determined by a CVA. 

 

The result of an inaccurate value determination, regardless of whether it is high or low, generally leads to undesirable consequences. For instance, if the value is too high, estate taxes will be too high; savvy investors or prospective buyers will usually disregard a value that appears too high. If the value is too low, you can be sure savvy investors or prospective buyers will recognize it and take advantage. Likewise, if you are on the other side of the dispute in a dissenting shareholder action or divorce, you certainly want to know you are receiving an accurate value for your interest. 

 

Determining the true value of a business enterprise requires a careful analysis of two primary components that make up value: tangible assets such as real estate, machinery, and furniture used by the business; and various intangible assets such as business or personal goodwill. Intangible assets might also include customer lists, trademarks, copyrights, distribution rights, a superior management team, non-compete agreements, physical location, special processes, and name recognition. 

 

To properly value a business enterprise, the CVA must acquire a thorough understanding of every aspect of a company’s dynamics, including management capabilities, company strengths, weaknesses and vulnerabilities, the competitive environment, overall expectations for the marketplace, and future economic prospects for the industry and the economy in the region and as a whole. All these elements affect the risk of ownership in a particular enterprise, and risk directly impacts value. Additionally, the valuator must analyze the inherent financial health of the enterprise and its future profit potential. 

 

After a thorough analysis of all the company’s dynamics and its financial health, the CVA must select the most appropriate methodology from among the many accepted by the valuation industry, and apply a series of calculations and formulas to arrive at the conclusion of value. Overall, the process is complex and requires a few weeks of time. Indeed, this is what is required to determine the true economic value of a privately owned business enterprise, and this is what a CVA brings to your table.