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Business Valuation for Small Businesses:
by Aimee S. McWhorter, Guest Columnist 
How much is a business worth? If you ask this question to 100 people, you will certainly get 100 different and unique answers. However, a determinable and agreed-upon value must be established for a variety of reasons. These situations include gifting, estates, divorce, buying or selling a business, buy-outs of business partners, employee stock ownership plans, succession planning, litigation, mediation, employee benefit plans, and charitable contributions.
Often, a small business constitutes its owner’s largest asset. Frequently, the owner has no true understanding of the value of his ownership.
Over time several regulatory bodies including Internal Revenue Service, Department of Labor, and Financial Accounting Standards Board have worked to help establish recognized and respected valuation theories to create consistency and guidelines for business valuations. By applying these procedures and incorporating industry, geographic, and economic specifics, business valuation can become more streamlined with estimated values falling into a smaller and more concentrated range. This consistency equates to fair dealings and a feeling of comfort for involved parties.
The business valuation process involves the analysis of financial information, the application of relevant ratios, and a review of both publically traded companies that are similar to the subject company and completed transactions of similar privately-held businesses. It involves extensive research into the industry, the specific factors of the business—from customer and supplier base to key personnel, liquidity, and appropriateness of facilities, and a thorough understanding of the economic environment in which the business operates at the time of valuation.
Since the goal of all valuation processes is to be fair to the involved parties, certain steps should be taken to retain the best person for the valuation engagement. Be sure to consider the following aspects prior to entering into any valuation engagement:
1) Independence and objectivity of the valuator to subject company
2) Professional competence of the valuator
3) Valuator's lack of financial interest in the outcome of the valuation
4) Valuator's appropriate supervision of staff and/or specialists (if used) and due professional care taken by the valuator
5) Valuator's experience in the subject industry and geographical region or to the ability and intention for the valuator to become familiar with the subject industry and geographical region
6) Your overall comfort level with the valuator and his/her ability to communicate with parties to the transaction
Business valuation is both and art and a science and no two valuations are alike. The goal of the valuator is to provide his/her best estimate of a value that is reasonable and fair to both parties. This is a goal that can only be reached through good communication between the valuator and the involved parties to the given transaction.
Aimee S. McWhorter, CPA, CFP®, CVA is a Shareholder with Smith, Parsley, & McWhorter, P.A. in Lexington, NC. She and fellow Shareholder, John E. Parsley CPA, CVA are Certified Valuation Analysts and Members of the National Association of Certified Valuation Analysts. They can be reached at 336.243.2772 or amcwhorter@spmcpas.com and jparsley@spmcpas.com with questions related to this article or the valuation process. Additional information available at www.spmcpas.com.
The views and opinions expressed in this article are those of the author and are not necessarily the views or opinions of Brinkley Walser, PLLC. The author of the article is a local tax professional and is unaffiliated with Brinkley Walser, PLLC. We welcome other local professionals to submit article ideas or entire articles for review and potential publication in future newsletters.
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