For example, if a company has subsidiaries, it may require a valuation of each of the subsidiaries if the companies are separately operating companies. The time to complete an engagement also depends on the availability of the financial information needed to complete the engagement. In divorce cases in particular, it can be difficult to obtain the necessary data in a timely manner, which increases the time of the engagement.

Valuation standards require valuers to perform various procedures for every valuation performed. For example, a site visit is usually necessary for all valuation engagements.

In general, it can take anywhere from 30 to 70 hours or more to prepare a comprehensive business valuation, depending on the circumstances of the case.

Is book value a good indicator of company value?

The book value of a company is simply the historical cost of the net assets less liabilities. Many times book value is the value stipulated in a buy-sell agreement but it does not represent “fair market value.”

Book value does not consider any appreciation of the fixed assets of the company. Accordingly, book value rarely represents fair market value even when an asset method is used to value the company.

Only in situations where the book values of the assets represent fair market value is this approach appropriate.

What is a minority discount?

A minority discount is a recognized reduction in the value of an ownership interest to reflect the fact that the interest lacks the ability to control the operations of the company. The interest typically lacks the ability to control salaries, pay dividends and affect key decisions of the company.

Numerous studies have shown that controlling interests of public companies sell at substantial premiums to their regularly traded minority shares. The inverse of this control premium is a minority discount.

A minority discount is appropriate if the method used to derive value results in a controlling interest value and the interest being valued is a minority interest.

The size of the minority discount depends on the degree to which the minority interest lacks the ability to control key management decisions.

It can be affected by the amount of shares held by other shareholders, minority shareholder statues, stockholder agreements and other factors, which indicate the lack of control of the subject interest.

What is a marketability discount?

A marketability discount is a recognized reduction in the value of an ownership interest that reflects the fact that an owner of a company lacks the ability to convert the interest into cash in a short period of time.

The owner of publicly traded stock has the ability to convert it to cash in a short period of time. Conversely, the owner of a closely held company lacks a ready market in which to sell his or her shares. Empirical evidence indicates that when a publicly traded company issues shares that are restricted from being resold for a certain period, the shares sell at substantial discounts to their unrestricted issues.

These and other studies indicate that shares that lack liquidity require a significant discount on the open market. Most closely held companies lack market liquidity and must be discounted to reflect fair market value.

When are values of public companies used to value private companies?

Many valuers use the valuation ratios of publicly traded companies to determine the value of their closely held business.

For example, if a group of public companies in a particular industry are selling for 70 percent of sales, this ratio can be applied to the closely held company to determine value. The valuation ratios of public companies can be used to value a closely held company when there is sufficient public company data in which to make a comparison.

The public company should be somewhat comparable in size and be in the same or similar industry of the subject company. If there is not sufficient comparable data, this method should not be used.

The comparable company should be analyzed to determine if it has truly comparable operations to the subject company. For example, if the public company you are analyzing has no debt and the subject company has a significant amount of debt, you should seriously consider whether to use it in your analysis. In practice, it is very difficult (but not impossible) to find sufficient comparable data to use this method.

How can I receive value out of my company when I retire?

Many business owners who contemplate retirement develop a strategy to “sell” their business upon retirement. This way, the value of the business that has been developed over time may be realized in cash. Our firm has assisted many of our clients in finding a buyer for their business. The resulting value may depend on the degree to which the client base can be transferred to another owner and the degree to which the seller helps in this process.

Another retirement option may be the establishment of an ESOP. Employee Stock Ownership Plans (ESOP) can be a powerful tool when you want to create a succession plan for a family business. It is possible for an owner to maintain control while selling a large portion of his or her business to the ESOP.

What else should I consider?

• Business Valuation
• Equity Compensation (FAS 123R, 409A, Stock Option, Put, Call, SAR, Restricted Stock, Pension Plan, ESOP)
• FAS 141/142
• Intellectual Property
• Real Estate
• Tangible Asset