What's your company worth?

• Author: Blackburn, Michael D.
• Position: Brief Article

Tips on achieving fair valuation

You've read about the owners of dot-com start-ups cashing out and becoming multimillionaires overnight. Or, there's the friend who sold his business for a few million and now plans to live a life of leisure. All this may have you wondering about the worth of your own business. But before dreaming of instant wealth, it's wise to develop a reasonable and credible valuation.

Set the Value

A valuation is considered the determination of the value of a company or an intangible asset on a specific date. Valuations are performed for a variety of reasons, ranging from mergers, acquisitions and marital dissolution to insurance claims, tax disputes and damage litigation. Valuations typically determine the fair market value of a company. In turn, the Internal Revenue Service defines fair market value as the price at which property would change hands between a willing buyer and a willing seller when the seller is not under any compulsion to sell, and when both parties have reasonable knowledge of the relevant facts.

Sound legalese enough? If not, consider the means used to arrive at a proper valuation.

There are a variety of valuation methods, The method used by CPAs and other professional valuators depends on the nature of the business and its capital structure, as well as the purpose of the valuation. Other factors, such as the location of a business, case law precedent, and state and local statute can also influence the determination of value. There are a number of common factors that valuators will typically consider.

As part of the process, valuators look at the company's past financial performance. Still, this may not provide the full picture of a company's value. The business's potential for growth is a critical factor in determining an entity's value. For example, consideration may be given to expectations of future growth of the industry, recent technological developments, or federal regulatory activities likely to affect not only the particular business, but also the industry as a whole.

Degrees of Risk

Every business is subject to some degree of risk. For this reason, valuators will look at risk factors including:

Economic risk - Economic conditions at the valuation date and how they affect the company, including the impact of changes in the economic environment.

Operating risk - Exposure to risk as a...