Business Valuations, Where is the Value?

If you poll business owners about how much their business is worth, you will get a broad range of answers.  Ascertaining the actual value of a business is not a simple matter.  The first step is to determine the type of value being analyzed.

Are we talking about Resale Value, Liquidation Value, Merger/Acquisition Value, Book Value, Divorce Sale Value, etc.  All of these situations present different circumstances, which lead to different valuations.

Merger/Acquisition Value

The Merger/Acquisition (M&A) value is typically the highest, as operational synergies drive the motivation to the transaction.  With operational synergies in place, the acquiring company should reap a greater return on the investment given the ability to reduce common overhead and also the ability to leverage each other’s product lines to cross sell.

Liquidation Value

On the other end of the spectrum, Liquidation Value is typically the lowest, as the Hard and Intellectual Assets of the business are sold to the highest bidder typically at a discount to book value.  Liquidation sales typically occur when a company is either not profitable, or not profitable to service debt.  In these cases, the company is sold off in pieces to yield some capital in the shortest amount of time to satisfy creditors.

Resale Value

In a transaction where the purchasing party does not have operational synergies it would be considered a standard Resale transaction.  Lacking operational synergies means that the Resale purchaser is not going to realize additional profit as easily as a synergistic M&A buyer.  Thus, for a Resale buyer to achieve a reasonable ROI, the transaction value will be lower than in a Merger/Acquisition situation.

Book Value

Book Value valuation does not have much relevance in any transaction, as the purchasing party is interested in ROI.  Thus, Book Value is not a common concern when contemplating the resale of your business to buyers on the open market.  Book Value is useful for accounting purposes.

An interesting note about Book Value is that in an asset intensive business such as a manufacturing company, book value can possibly be higher than a Merger/Acquisition or Resale value.  This is usually vice versa in service businesses, where book value may often be much less than a Merger/Acquisition or Resale value.

Divorce sales

Divorce sales are certainly thorny and complicated for Business Valuation purposes, as the outcome of ownership may be at stake in addition to the future of the business.  Also, some Divorce situations involve sole practitioner type businesses, which are difficult for Valuations, since they are not easily transferable to arms length buyers.

For More information on how Just Elementary, Inc, can help you with Business Valuation Matters for your business contact our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com