Answering Common Questions from Clients: What is the Value of My Business?
Business owners often approach their legal counsel with a myriad of legal and financial issues that include needing to know the value of their business. Clients can be tempted to ask ChatGPT to value their business or consult with their tax CPA. But when everything is on the line, a low-cost answer can not only be entirely wrong but highly risky. That’s when attorneys and their clients turn to us to develop a professional and well-supported opinion of value.
Business owners and their attorneys most often need to know business value in connection with:
- A shareholder dispute/buyout
- A potential sale or merger
- An employee stock grant
- Estate or gift tax reporting
- Divorce or other legal proceedings
Depending on the reason, we conduct either a comprehensive business appraisal or a more streamlined value calculation. The right choice depends on your goals and the required level of assurance.
- Full Appraisal → Needed for legal, tax, or regulatory purposes.
- Value Calculation → Efficient and cost-effective for negotiations or internal planning, such as exploring a sale.
What You’ll Need to Get Started
We typically begin by requesting five years of your company’s financial statements. We may also ask for:
- Ownership structure and operating agreements
- Owner/officer compensation details
- Management projections
- A conversation with leadership to understand your business
These help us build a detailed picture of your operations, financial trends, industry risks, and future growth potential.
How Do We Determine Value? By Using Three Approaches to Business Valuation
Once we receive requested documents, we consider the following three approaches when valuing a business:
- Income Approach: The company’s estimated future cash flows are converted to value using an appropriate rate of return.
- Market Approach: Valuation ratios are used based on either (1) stock prices of similar companies or (2) sales of comparable businesses. See my previous piece on How Appraisers Use Transactions of Similar Businesses to Value a Company for more on the Market Approach.
- Asset Approach: The company’s assets and liabilities are restated from historical cost to market value. For a deeper dive on the Asset Approach, see my previous article here.
When valuing an operating service-type business, the Income and Market Approaches are typically preferred, while the Asset Approach is usually attributed more weight for an asset-holding company, such as an LLC holding real property or a machinery manufacturer.
Bottom Line
Determining the value of a business involves a thorough understanding of its financials, operations, and market position, along with applying the appropriate valuation approaches based on the type of business and valuation purpose. A well-executed valuation not only tells you what your business is worth but also shows what drives that value, how you compare to others in your industry, and gives you the confidence to make informed decisions for the future.
Want more on this topic? See our previous articles:
Answers to Top 3 Questions on Business Valuation Approaches
Answers to Attorney FAQs on Preferred Business Valuation Methods.
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To learn more about the valuation process or to discuss a potential valuation, please contact Paul Heidt.
Paul Heidt, CPA, ASA, ABV brings close to 25 years of specialized experience in financial analysis and research. He has performed 250+ business appraisals for litigation, gift and estate tax planning, marital dissolution, business transactions, reorganizations and succession planning.
503-906-1583 | [email protected]
