The fundamental goal of business valuation is to determine the fair market value of the business. Although this sounds simple, it doesn’t provide much help on how to determine the value. It is a mistake to believe that businesses have a single value and valuation will arrive at one indisputable value. Valuation is not an exact science. There are many methods used to arrive at a business’ value. A valuator can use one method or a mixture of many. In a divorce, when a business formed during marriage must be divided, spouses may be motivated to get the business valued at a specific amount. Therefore, the divorce attorney must understand the method(s) used and those which were not used. Only then can the attorney begin to attack or defend the valuation. Below are certain valuation methods. These is not an exhaustive list. It is only meant to only illustrate how different methods of valuation can lead to different values.
One method to determine the value of a business is called asset value. Here the valuation is based upon the assets that business holds. The value of the business is the total value of its assets. Similarly, the liquidation value of the business is the value of the assets if they were sold when the business was shut down. These models are problematic because they do not take into account the company’s goodwill, that is the intangible value of the business.
Another model is book value. This is the difference between the business’ assets minus its liabilities. This is problematic because the book value does not contemplate the earning capacity of the business.
Next, is going concern value. This is a valuation based upon the company’s future profits. However, valuators will look at past performance to determine future value. This may not be appropriate as past performance may not provide an accurate future value.
Lastly, is discounted cash flow. This is done by calculating how much free cash the company will have, taking into account future investments, equipment replacement, and other uses of its cash.
The Botti Law Firm, P.C. has been serving DuPage and Cook County residents for nearly 50 years. We have vast experience handling cases involving businesses. If you would like to speak to one of our experienced attorneys, please email us or call (630) 573-8585 to schedule a free consultation.
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