Part 1: To Determine Value, Get Professional Help
Too often, business owners rely on the financial statements prepared by their CPA’s to determine business value. In fact, sales prices often far exceed the values suggested on financial statements.
Compilations and audited statements serve a valuable purpose in establishing hard asset value. They are not intended, however, to represent the fair market value of the business in a sale, and should therefore not be used for that purpose.
For example, a financial statement will not attempt to value a business’ “goodwill”, i.e., the value of the business’ name in the community, its customer relationships, and its soundness as an ongoing entity. A loyal group of key employees will also make the enterprise more desirable to potential buyers, yet the typical CPA is not trained to assess the impact of such factors upon the sales price the business can command.
In addition, if your business operates on a cash system of accounting, there may be no entry on your financial statement to reflect the value of accounts receivable. A proper valuation would assess the accounts by analyzing the likelihood of their being collected and the time frame within which collection is expected to occur.
Business valuations are available from professionals trained in that field. In many cases, business brokers or merger and acquisition firms will perform a valuation as part of their service in a commissioned sales representation.
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