What Is a Business Valuation?

A business valuation, which can take various forms, is the process of determining the value of a business enterprise. It involves the application of industry accepted methodologies coupled with the detailed understanding of the business. The valuation can be stated as a single number or a range of numbers, and can be presented informally or through the issuance of a detailed valuation report. Value can be defined differently for different situations, so the valuation professional must also understand the reason of the valuation to determine the correct definition of value to use. They must properly explain the definition they are using to the user also.

Why Is a Business Valuation Necessary?

Business valuations are performed because an ownership interest in a privately held business will often represent the most significant asset in one's portfolio or estate. In addition, unlike stock in a public company whose value is readily obtainable by looking at the most recent value listed on an exchange, the value of the privately owned business is not known because there is no active market or exchange to sell or trade that interest. Therefore, to obtain a valuation that can be relied upon, a business valuation must be performed. In addition, not anyone is capable to perform such valuations because there are specific methodologies that are acceptable and the business valuator must be cognizant of all these methods and know how to apply them. This is especially true if the valuation is to be the subject of legal or tax scrutiny.

Valuations are performed to determine the value of a company for:

• Estate tax calculations
• Gift tax calculations
• Estate & gift tax planning
• Valuation in a divorce settlement
• Valuation for negotiation in a purchase or sale of a business venture
• To establish the value of a charitable contribution
• Buy/Sell Agreements
• Life insurance
• Action in eminent domain cases
• Damages for business disruption
• Settlement of dissenting shareholder actions
• Employee stock ownership plans (ESOPs)
• Family limited partnerships
• Initial public offerings (IPOs)
• Partner disputes
• Split-ups/spin-offs of a division or subsidiary
• Business succession and exit planning
• Venture capital and other financing needs

In addition to the above, one of the best reasons for a valuation is to help business owners and management understand what drives value. One of the prime objectives of every business is to improve its value to the owners. Not every business owner understands what creates value. A properly prepared business valuation will provide the owner with the strengths and weaknesses of the company and will point out the most important drivers of value for the particular industry. This will help the company focus its efforts to the areas that really matter.

What Professional Competence Does the FDC Staff Have?

Our staff includes Certified Valuation Analysts (CVAs). This is a designation obtained from the National Association of Certified Valuation Analysts (NACVA), one of the more recognized organizations in the business valuation field. To obtain the designation of CVA, one needs to obtain the knowledge of business valuation through education offered by NACVA. In addition, a CVA needs to pass a rigorous examination and prepare a formal valuation report. In addition, once the CVA designation is obtained, to maintain the designation the CVA must meet continuing education requirements to ensure they are staying abreast of the latest in the field. As a prerequisite to obtaining a CVA certificate, the candidate must also have their CPA license. Our staff also includes Certified Public Accountants (CPAs) who have demonstrated professional competence by meeting high education and experience standards for the accounting profession, passing a rigid, nationally uniform examination, and meeting state licensing and continuing education requirements.

Why Use a Certified Valuation Analyst?

The use of a Certified Valuation Analyst (CVA) ensures that your valuation will be performed by someone who has acquired the necessary education (including continued professional education on an ongoing basis), training and experience to perform a valuation. The CVA understands that every business is different, and that they can not rely upon industry rules of thumb. Instead they must acquire a thorough understanding of every aspect of the business including its strengths, weaknesses and vulnerabilities. In addition they must understand the environment the business is working in, both industry and economic. Then the CVA must understand the financial results of the business and adjust the results for items that would not be applicable to a prospective purchaser to gain an understanding as to what the true profitability of the business has been. This will help the CVA estimate what the true profitability can be expected to be from which to base the valuation on. Once the estimated true profitability is obtained, the CVA must select the most appropriate methodology from among the many utilized in the valuation profession. Then a series of calculations and formulas must be applied to arrive at the ultimate conclusion of value. Overall, the process is highly complex and requires a significant amount of time. This is what is required to determine the true economic value of a privately owned business, and this is what a CVA brings to the table.

Additionally, a CVA is required to adhere to industry standards in performing valuation services and communicating their conclusions of value. The standards are intended to assure users of the valuation that the services they receive meet an industry-acceptable level of due care, including the thoroughness of the analysis and the communication of the results. Furthermore, the industry standards require adherence to ethical guidelines in the performance of valuation engagements, providing added assurance to valuation users that the CVA will perform their services conscientiously and competently to the best of their abilities.

Who to Contact?

To obtain more information about business valuations in general, or how a valuation of your business may be appropriate, please contact:

Mr. Michael DeStefano, CPA, CVA
T 631-348-0700 x303
F 631-348-0705
michaeld@fdccpa.net