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How Much Is Your Business Worth?

The first step in valuing a business is determining which standard of value is appropriate under the circumstances. Failure to do this can lead to totally inappropriate value conclusions.

“Value” is a meaningless term in the appraisal profession. Until the specific standard of value is identified, the professional valuator cannot provide a meaningful opinion. The most frequently used standards of value include:

& #711; Fair Market Value. This is the price at which property would change hands between a willing buyer and a willing seller , when the former is not under any compulsion to buy and the latter is not under any compulsion to sell , and both parties have reasonable knowledge of relevant facts.

& #711; Fair Value. This term is typically defined by state statue and is commonly used in dissenting shareholder actions. Frequently, fair value disregards minority interest discounts. The dissenting shareholder is deemed to be entitled to his or her share of enterprise value.

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& #711; Investment Value. Investment value represents the value to a particular investor based on his or her individual investment requirements. The investment value can differ among investors due to perceived differences in:

o Risk.

o Earning Power.

o Growth.

o Tax Status.

o Synergistic opportunities.

( Liquidation Value. It represents the net amount that an owner could realize if a business is terminated and the individual assets are sold off. If an immediate auction sale is required, forced liquidation value is appropriate. If a more orderly, planned liquidation is possible, a higher orderly liquidation value is achieved.

With this in mind, here are 10 characteristics of a business enterprise which are critical to the creation of value. The absence of these characteristics inevitably will drive value down.

& #711; Value Enhancers

& #711; Value Detractors

1. Trained, stable work force.

1. Low morale and high employee turnover.

2. Established, creative management team.

2. Dominant, autocratic leadership.

3. Product/service with a clear competitive

advantage.

3. Highly competitive product/service lacking differentiation.

4. Stable revenues and profits.

4. Volatile revenues and profits.

5. Clearly defined goals (i.e., corporate focus).

5. Lack of a cohesive business strategy.

6. Expanding markets.

6. Stagnant or declining markets.

7. Opportunity for significant productivity

increases.

7. Limited productivity enhancement potential.

8. Well maintained plant and equipment.

8. Poorly maintained physical plant.

9. Effective management information systems.

9. Lack of management information.

10. Barriers to market entry.

10. Ease of market entry.

Identify and implement the value enhancers well in advance of marketing your company. The economic rewards will be substantial.

Mitchell, CPA is a partner with the local firm of Grice, Lund & Tarkington, LLP, CPAs and heads up the Business Valuations Team.

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