Business Valuations

Fair Value is defined as the price a buyer might reasonably expect to pay and a seller might reasonably expect to receive for the subject property, assuming:

• That the subject property is held for sale on the open market for a reasonable period.
• That both the buyer and the seller are in possession of all pertinent facts.
• Neither the buyer nor seller is under any unreasonable compulsion to act, and,
• That no adjustment shall be made for the non-control status of the subject block of shares.

This definition incorporates the following assumptions:

• The prospective purchaser is prudent and profit seeking, and without synergistic benefit.
• The business would continue as a going concern and not be liquidated.
• The business would be sold for cash or cash equivalent, and
• The business would be held on the market for a reasonable period of time.

The definition of fair value has been further clarified by the Revised Model Business Corporation Act (RMBCA or the Model Act). This act has been adopted by the American Bar Association's  (ABA) Committee on Corporate Laws and recommended by the ABA's Section of Business Law. It serves as a model for many state legislatures in their creation of statutes concerning rights of objecting shareholders to fundamental corporate changes and certain exchanges of shares.

In a fair value computation, the value of the corporation's shares will be determined:

• Immediately before the effectuation of the corporate action to which the shareholder objects.
• By using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring valuation, and
• Without discounting for minority status.

Item number three above is important because imposing a minority discount on compensation payable to dissenting stockholders for their shares in proceeding under CLS Bus Corp. Section 623 or Section 1118 would necessarily deprive minority stockholders of their proportionate interest in a going concern, and would result in minority shares being valued below that of majority shares, thus violating mandate of equal treatment of all shares of same class in minority stockholder buy-outs.

When do you need a Business Valuation?

When do you need a Business Valuation?
If one of your business partners, accountant, or legal advisor has ever advised you to have your company valued or appraised, chances are that you have quite a few concerns and questions about the process. In fact, most business owners are unsure about what to expect when they hear the term “business valuation” or “business appraisal,” which is not at all uncommon as many accountants and legal advisors have differing internal definitions as well.

Why do I need a Business Valuation

Why do I need a Business Valuation
Why aren’t your internal financial statements enough? Why can’t your accountant just run the numbers and come up with a value? How much is this going to cost?
Considering the depth and scope of some of these questions, business valuation is a relatively simple concept to understand. Cost depends on the scope of the assignment and purpose for the appraisal, with larger, complex projects requiring more time, and a higher cost, than smaller, simpler engagements. 

Introduction to Business Valuation?

What is a Business Valuation?
What exactly is a business valuation? To answer this question, consider the following example. Suppose you hold Apple, Inc. stock in your portfolio and you want to know how much it is worth. Well, all you have to do is pick up your smart phone, run your finance app, and look up the price of APPL and multiply by the number of shares you own. Through this simple exercise, you have valued your Apple, Inc. shares or what you would receive in cash if you sold your shares at that current price.
In concept, valuing your privately-held business is the same as valuing APPL stock. However, because your business is private, there is no finance app or newspaper stock table to which you can conveniently turn. This is where we come in, as there is a pseudo-science, or some say an art form, that provides the foundation for skilled business appraisers to estimate what your business is worth. In essence, business valuation is a process and a set of procedures used to estimate the economic value of your ownership interest in a business.
While a business valuation can take many forms, from something as simple as being a discussion topic in a meeting; or providing summary letters and supporting schedules; or providing a full appraisal report. An in-depth appraisal report is subject to rigorous industry standards and analyzes your company’s financial information as well as qualitative factors (industry outlook, management quality, etc.) to determine its fair market value.