The Smart Business Approach
It is critical to determine the purpose of the business valuation. The purpose of a business valuation shapes the choice of valuation methods used by the business valuator. Different valuation approaches and concepts will be appropriate for different business valuation purposes.
Many businesses owners use tax returns or financial statements prepared using the tax basis of accounting for the financial presentation of their business. Other business owners elect to incur the costs charged by Certified Public Accountants and have prepared either reviewed financial statements or, even more costly, Certified Financial Statements. In either of the aforementioned situations, the financial information reflects the “historical cost basis of accounting;” not the Current Market Value or Selling Price of Assets, Liabilities and Owner’s Equity (sometimes referred to as Stockholder’s Equity or Net Worth) of the business.
While this may be good financial statement presentation for tax purposes, tax return based financial statements do not reflect the owner’s years of hard work in accumulating business assets. The entity’s goodwill or intangible value represents a major component of the entity’s Total Value. In every instance when Income Tax Returns and Financial Statements Based on Income Tax Returns are used for valuing a business, the financial statement information must be Restated to Reflect Current Economic Values.
RWS employs an established technique utilized and accepted by business owners, business lenders as well as business brokers defined as Recasting Financial Statements (RFS), more fully described as follows:
Historical income statements are adjusted to present the business as if it had been managed to maximize profitability. Since privately owned companies tend to keep reported profits and resulting taxes as low as possible, adjusting the financial statements is an important element to understand the true earning capacity of the business. These adjustments allow for meaningful comparisons with other investment opportunities and greatly increases the accuracy of the entity’s Total Value or Selling Price.
Business Goodwill or Intangible Value, representing a major component of the total business value, is completely ignored for income tax purposes and is not fully addressed in financial statements. However, in recent years the accounting profession has moved in the direction of disclosing fair value for selected assets reflected on the balance sheet of audited financial statements.
For a business to grow and expand in today’s market, access to capital and financing sources is essential. Professionally prepared business valuations, such as those prepared by RWS Business Valuation Services, are powerful tools that highlight important performance metrics routinely utilized by capital and financial sources.
A professionally prepared Fair Market Value or Selling Price Business Valuation is essential when the:
- Business owner is ready to consider selling their business, or
- Business buyer is considering the acquisition of a business, or
- Business is seeking capital to grow or expand in today’s market