Five Things That Can Impact the Value of Your Business

By:  Jeffrey D. Jones, ASA, CBA, CBI

1. Not all values are the same.  Understanding the Standard of Value to be used can make a big difference in the final opinion of value.  The following is a brief description of the Standards of Value that can be determined, depending upon use of the appraisal.
   1. Fair Market Value – A willing seller and a willing generic buyer, not a specific buyer, both having knowledge of the facts, and neither being under compulsion to buy or sell.
   2. Investment (Synergistic) Value – Value to a specific buyer who can gain synergistic benefits that will enhance the earnings of the subject company
   3. Fair Value – In a litigation setting involving dissenting partners/shareholders, the concept is to use pro rata value of the company value rather than a discount for owning a minority ownership interest.  In valuing a public company for reporting purposes, Fair Value means value to a market participant who may obtain synergistic benefits from an acquisition.
2. The use of the appraisal can impact value.  Value is a range concept and the use can influence the final opinion of value within that range.  Often the courts or the IRS can impose specific criteria that can impact value.  Typical uses for an appraisal are:
   1. Gift or estate tax planning
   2. Buy-sell agreement
   3. Merger
   4. Divorce
   5. Shareholder litigation
   6. Economic damages
3. The ownership interest being appraised can significantly impact value.  Partial ownership interest typically requires discounts from pro rata value, depending upon the use of the appraisal.  Even controlling ownership interest requires a small discount, and minority ownership interest can require discounts of 30% to 80% from pro rata value.
4. The size and scope of the business can and often does impact value.  Buyers for larger businesses are willing to pay higher multiples of earnings than for small businesses, due in part to the larger earnings, the number of buyers who are looking to acquire larger businesses, and the fact that they usually have less risk due to multiple layers of management, diversity of products and services, and greater geographical markets.

1. Other factors that impact the value of a business include:

1. The nature of the tangible assets – Service businesses typically have few assets, whereas

manufacturing companies typically have a lot of assets.  Buyers            typically like tangible

assets and are willing to pay more for a company with assets even when the earnings are

the same.

1. Geographic location – A business located in what is deemed to be a “bad

side of town” will sell for less than the same type of business with the same earnings

located elsewhere.

1. The levels of management – Businesses where the owner controls a significant portion are deemed more risky than those businesses where there are multiple layers of

management.

1. The mix of customers – Businesses that have a customer/client that represents 15% or

more of the total business are deemed more risky than when business is spread over a

large base of customers/clients.

1. Age of the business – Businesses that have a five year track record are deemed to be

more stable than younger businesses.

When a business appraisal is needed, here are two websites that have a directory of qualified business appraisers.

1. The American Society of Appraisers (http://www.appraisers.org)
2. The Institute of Business Appraisers (http://www.go-iba.com/certify.asp)

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Jeff Jones is President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc.  10500 Northwest Frwy., Suite 200, Houston, TX  77092  713-401-9110,
[email protected] www.advanced.com.