A business valuation specialist determines the value of a closed business without selling it on the open market. It is not an exact science and requires expert analysis of factors that affect the selling price. The specialist uses an income, asset or market approach to valuation and produces a written report. They are hired in situations such as divorce cases, commercial disputes, and structured acquisitions.
A business valuation specialist determines what an owner’s interest in a closed business is worth without having to actually sell the business on the open market to establish a sale price. It is not an exact science, and the only way to know the true value of anything is to see what is sold under free market conditions. The expert uses an economic model that takes into account key business resources and personal judgment to obtain an opinion on the value of an owner’s interest under prevailing circumstances if it were to be sold.
It is relatively easy to establish the value of a person’s interest in a public company. A person’s shareholding is represented by the number of shares he owns and the price of an individual share is fixed by trading on the stock exchange. Multiplying the number of shares owned by the selling price of a stock on a given day will provide an accurate valuation that can be used in most cases. Companies that are not publicly traded have much more difficulty establishing the value of ownership interests.
One of the general maxims of a free market economy is that an item is only worth what people are willing to pay for it. Establishing value without using sales data is a decision that requires expert analysis of factors that are likely to affect the selling price. A business valuation specialist is hired to do this analysis, usually when an owner needs to buy another business without actually selling the business.
The most common situations where a business valuation specialist will be needed are divorce cases, commercial disputes between owners, and structured acquisitions where no sale price has been set as part of the contract. In a divorce, the court needs to know how much one spouse’s interest in a business is worth so that an equitable distribution of marital assets can be made to the other spouse. The spouse who owns the business may not want to sell the business to establish this value; therefore, an expert will be hired to determine what the court will use in lieu of an actual sale.
A business valuation specialist uses an income, asset or market approach to valuation. These three economic models combine standard financial calculations with expert judgment on intangibles such as risk and growth potential. The specialist analyzes the company’s financial statements, makes an assessment of tangible assets and considers the market conditions in which the company is located. It produces a written report that presents calculations, findings and conclusions. Occasionally, he will have to defend his assessment methods and conclusions if his report is challenged by an interested party.
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