Business And Financial Interest Valuation Article

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Business and Financial Interest Valuation

The Business and Financial Interest Valuation Primer for Advisers. There is no asset that appears to confound advisors more than ownership in a business enterprise...

Author: Biz

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(As Published by the American Institute of Certified Public Accountants: Chapter 8)

There is no asset that appears to confound advisors more than ownership in a business enterprise; perhaps, more so, a partial interest in a business or real property. The sheer number and impact of legal and financial issues has a myriad of implications on value. It is human nature to steer clear or minimize the net result of these issues, as they can be daunting. However, in the absence of substantial and independent conclusions that are empirically supported, opinions of value are mere guesses. Such estimates can lead to egregious losses of thousands, if not millions of dollars for your clients. A working relationship with a seasoned business valuation analyst (appraiser) can secure your advisory role with clients who require your advice in areas ranging from estate and succession planning to enhancing value via a thorough review of current operations.

Business appraisal and economic damages analysis is a niche. The CPA credential, in of itself, is unlikely to provide the requisite skills and resources to render opinions of value and may pose some conflicts of interest as well. Even after performing well over 350 written business valuation and damage assessment reports; holding membership and/or accreditation in all of the national business valuation organizations and providing testimony in over 100 depositions and court, there is much to learn about this industry. This chapter will provide insights to many of the issues confronting the business valuation analyst in the context of estate related work.

Thinking like an investor

Regardless of the property held, the business appraiser's role may be simplified by attempting to simulate and quantify the most likely decisions made by a pool of investors. Obviously, marketable securities of publicly traded companies represent highly liquid, minority interests that can be bought and sold in minutes with cash changing hands in a matter of days. An investor principally examines several factors, but inevitably is concerned with the degree of risk compared to the economic benefit or return. Returns may be achieved by growth (capital appreciation), income (distribution of dividends) or both. The greater the likelihood that growth and income will be achieved, the lower the risk. The lower the risk, the higher the value of the property and the investment expected to acquire it. In simple terms, how much cash can be readily and consistently received during what time frames? This is basic financial theory where the property owner has to be aware of the market and economic climate for the specific investment as well as others, which may offer less risk or higher returns.

The second issue is one concerning holding period and liquidity. If the asset cannot be readily sold due to the impairment of having a limited pool of buyers, then the holder of an interest in this property may not be readily able to achieve a “cash equivalent” value as of a specific date when (s)he wishes to sell without adjusting price sufficiently to attract a buyer. Therefore, the adjustment or “discount” becomes more profound in cases where the interest held generates little or no income or when the investor has little or no control over the performance and subsequent sale of the asset.

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