Business Valuation: What’s It Worth, and to Whom?

What is a business worth? It depends on a lot of things. A better question is: What is a business worth to whom?

Every valuation has a purpose, and different purposes require different standards of value. For example, if a business is being sold, its value may be different than if it were being assessed for estate planning purposes.

Some standards are mandated while others just make more sense in certain situations. Here’s a quick look at three common standards of value:

1. Fair Market Value
   The most common standard, fair market value is used in almost all state and federal tax matters. It is defined by the AICPA’s International Glossary of Business Valuation Terms as the “price, expressed in cash equivalents, at which property or business would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, where neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
2. Investment Value
   This standard assumes that certain synergies exist between buyer and seller. It’s typically defined as the value of a business or property to a specific buyer. For example, an investor may have specific requirements or expectations for an acquisition, like gaining a competitive edge or expanding geographic distribution of his or her product. If the target business meets those specific criteria, its value is enhanced.
3. Fair Value
   This standard is generally used in cases of dissenting stockholders’ disputes. Many states define fair value with respect to dissenters’ shares as “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects.”

If you’re considering a valuation engagement, contact us to discuss which standard would be appropriate for your needs.