By Shawn Hyde, International Society of Business Appraisers (ISBA) –
Publicly traded companies are valued every day on the stock market. But how do private business owners determine what a fair price is to buy out their partners? At what price they should sell their company? What’s the value of a 10% ownership interest in their company for gifting purposes?
The International Society of Business Appraisers (ISBA), www.intlBCA.com, exists to teach people how to answer these and other questions relating to the values of small businesses. Appraising privately held businesses involves logical thinking, financial analysis, and a healthy dose of practicality.
Some folks look at an enterprise’s balance sheet, find the equity section, and state that this is the value of the company. Not necessarily. If the company is going to be sold, are all the assets listed on the balance sheet going to transfer to the new owner? Also, the assets tracked on the financials are listed at cost less accumulated depreciation. If the equipment is fully depreciated, does that mean it has zero value? What about intangible assets like goodwill? This asset is typically not even listed on the balance sheet, and if it is, it only accounts for that portion that was purchased and not any goodwill that exists as part of the operation of the subject business.
What about partial ownership interests? If a business is worth $1,000,000 and you own 30% of it, did you know that the fair market value of your 30% ownership interest is NOT $300,000? Partial interests are worth less than their pro-rata share. How much less depends on many different factors. Partial ownership interests are typically worth less than their associated percentage for two main reasons: 1) a partial ownership interest does not have the ability to decide how much cash to distribute to the owners; and 2) unlike publicly traded companies, there is no open market where investors can buy and sell shares in corner hardware stores and local coffee shops.
Another key factor in the determination of the value of a business or a partial ownership interest is whether or not the applicable standard of value is fair market value, or if one of the other standards of value should be used. Depending on the nature of the valuation assignment, the rules of the engagement could be different.
I am often asked, “How can my company have different values on the same date? It’s the same company and nothing has changed!” Have you ever looked up the value of your car on Kelly Blue Book (www.kbb.com)? Your car has a value under the “Trade In to a Dealer” category and a different value under the “Sell to Private Party” category. It’s the same car and nothing has changed, so why are there two different values? It’s because the purpose changed. Likewise, the value of a privately held business changes based on whether it is being offered for sale, if it is the subject of a property division, if it is part of a taxing issue, or any of several other potential purposes.
My name is Shawn Hyde and I’m the Executive Director of the ISBA. I’ve been appraising privately held companies for over 20 years, and I’m excited about sharing my knowledge with you! If you have any questions, or would like to pursue your own certification as a business appraiser, please contact me at shyde@intlBCA.com.
About the Author: Shawn Hyde, CBA, CVA, CMEA, 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 and a Certified Machinery & Equipment 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 he is a past Editor in Chief of the IBA’s professional journal, “Business Appraisal Practice.”