There are many reasons to have a business valued, including planning for a sale or retirement, estate planning, a divorce or a partner buyout. This article explains some common ideas behind a valuation. It is not a do-it-yourself guide, because a formal valuation should be done by a qualified professional.

The starting point

Begin with up-to-date financial statements. A valuator will generally look at the income of the business and the value of its assets. Book values may need to be adjusted, since items like machinery may be worth more or less than the amount shown.

Going concern or liquidation?

Most profitable businesses are valued as going concerns, meaning they will keep operating. A liquidation value may matter when the assets are worth more on their own than the business is worth based on its earnings.

Normalizing income

A valuator often adjusts earnings to show what the business would earn under normal operations. For example, one-time costs or unusual owner compensation may be adjusted.

Common approaches

• Income approach: based on the earnings or cash flow the business is expected to produce
• Market approach: based on sales of similar businesses
• Asset approach: based on the value of assets minus liabilities

Why the purpose matters

A valuation is ultimately an opinion based on facts and assumptions, and different purposes may call for different standards. A divorce valuation may be handled differently from one for a partner buyout, so be clear about the purpose at the start.

Need help with your situation? Tax rules change and every situation is different, so please talk with a professional before acting on general information. Call Fajardo & Associates at 407-720-7220 to make an appointment.