By Shawn Hyde, International Society of Business Appraisers (ISBA) –
According to the 2018 Small Business Profile by the U.S. Small Business Administration, there are about 30.2 million small businesses in the USA. Every so often, one of these businesses runs into a situation where the owner asks the question, “What is my business worth?”
A variant of that question might also be, “What is a specific percentage of my business worth?”
These questions get asked in situations such as the following:
• When a partner wants to buy another partner’s ownership interest
• When an owner wants to bring in a new partner
• When the business is located in a community property state, and the owner is getting divorced
• When an owner receives an unanticipated offer to purchase the business
• When the owner wants to sell the business
• When an ownership interest is being gifted to children, and a gift tax return is needed
• When the business wants to sell to an Employee Stock Ownership Plan (ESOP)
• When a non-controlling owner believes there are grounds for a shareholder oppression lawsuit
• When an event causes a business to experience economic damages or losses
This is not an exhaustive list, but just a taste of some of the reasons why someone might ask the question. There are a lot of opportunities, among almost 28 million small businesses, for someone to wonder what the answer might be for his or her particular business.
What is really interesting, however, is that the value of a small business is not static. It varies over time, as operations and market conditions change. Suppose the business has just entered a new market, or lost a key employee, or opened a second location, or a competitor has opened up a location just down the street, or the local economy has recently started to grow at an increased rate? Each of these scenarios could result in a different value for the same business.
The value of a business can also change depending on the reason the valuation is needed. A simple example of this is illustrated with Kelley Blue Book (www.kbb.com). Kelley Blue Book is the most common resource for determining the value of a used car. If you go through the process on the Kelley Blue Book website to identify the value of your car, the site will give you both the Trade-in Value and a Private Party Value. The values will differ depending on whether you are selling the car to a private individual or to a dealer. It’s the same car, but it has two different values as of the same date, depending on how you plan to sell your car.
Business values work the same way. The value will be different if the business owner is getting a divorce vs. selling the business to a third party. There are many reasons for why this is so, but those are outside the scope of this article. (If you would like to discuss that question, please contact me.)
These questions are being asked almost every day, and there are really not that many people, relatively speaking, who are able to respond authoritatively. This is why, oftentimes, a business owner will look at the balance sheet, find the equity number, and decide that is what the business is worth.
There are a few problems with that answer, however (see a previous post for a discussion of the book value of equity), not the least of which is that the equity on a balance sheet does not include all of the intangible asset value the business might have.
If you have any questions, or would like to learn more about how to determine the Fair Market Value of a privately held business, or you would like to pursue your own Business Certified Appraiser (BCA) certification, please contact me at shyde@intlBCA.com. The International Society of Business Appraisers (ISBA) can teach you what you need to know to get started.
About the author: Shawn Hyde, CBA, CVA, CMEA, BCA has over 20 years of valuation and appraisal experience in numerous industries. He currently serves as the Executive Director of the International Society of Business Appraisers (ISBA) www.intlBCA.com. He is a Certified Business Appraiser, Certified Valuation Analyst, Certified Machinery & Equipment Appraiser, and a Business Certified Appraiser. He has written and taught courses for the Institute of Business Appraisers (IBA), the National Association of Certified Valuators and Analysts (NACVA), and the International Society of Business Appraisers (ISBA). He has served on the IBA’s Education Board, and the IBA’s Board of Governors, and is a past Editor in Chief of the IBA’s professional journal, “Business Appraisal Practice.”