Business Valuation Purpose: What is Valuation or Evaluation? Why does the company value change depending on the valuation PURPOSE? Are you looking to understand how to value a company?
Sometimes when people first hire a valuation expert to value their business they are confused when the valuation analyst starts telling them about the different values of the company. Why are there different values for the same company?
Well to be honest, the difference really lies in understanding the purpose for the valuation.
- Is the valuation going to be used in a divorce matter?
- Is it going to be used for estate planning or gift tax purposes?
- Is the company valuation going to be used because a new partner is coming into the practice?
- Or is the owner trying to sell the business?
These are all valid reasons to get a business valuation, but, the value of the company could be different depending upon the reason for the valuation.
I know, this concept seems very strange to you. In order to really understand why the value of the same business can be different depending on the purpose, we need to first understand more about business valuation methodology. I am sure you really don't want a seminar on valuation methods, so let me explain it as simply as possible.
One example could be when a person is selling a company to another company or individual there could be strategic benefits from the combination of the two companies. In essence, and means the selling company would be worth more worth more to a strategic buyer than to a person or company who knows nothing about the current business. This is called the difference between investment value and fair market value
Another example is When a person is valuing the company in order to gift shares to their son or daughter or other family member the IRS allows several discounts to that value.
This means the person will pay less taxes in order to transfer shares to the family member. This is yet another type of valuation.
Lastly When a person is valuing a company for divorce, each state has different case law which determines how to value the business.
There are also issues regarding personal goodwill, or the value contributed to the owner of the business, and enterprise goodwill, which is the value contributed to the company as a whole.
These are just some simple examples of how the same company could have a different value depending upon the purpose of the evaluation. This is why it is important that you are hire in valuation expert, the person understands all of these differences.
If you would like to learn more about how to value a company, how to buy a business or how to find a qualified valuation appraiser, give us a call at (314) 541-8163 or check out our videos at www.YouTube/BusinessValuationSTL