By Ernie Whitehouse
Central to any type of ownership change and/or restructuring is determining the value of your business. You need to understand the market value of your business when exchanging ownership shares, creating options to purchase, or establishing a tax baseline for family transfers.
If you’re contemplating buying, selling, merging, adding partners, exiting your partnership or transitioning ownership to family members, you need to establish a benchmark value for the business.
The first step is a forensic accounting review, which processes financial statements and formulates them to industry standard. Next, statements are adjusted for unusual and non-customary items, which are typically found in small, privately held companies. These items are unrelated to the functional operation of the business. The goal is to create a true form EBITDA (earnings before interest, taxes, depreciation and amortization) for which a buyer and/or seller can attest is being consistently generated by the business.
Valuation factors, or discounted cash flow, are a function of the economic environment, market conditions, and strength of the company, management talent and historical consistency of EBIDTA. While there are many published “formulas” for valuing your business, most of them ignore the importance of forensic accounting, market conditions, the valuation of goodwill and intangibles, and how the transaction will be structured. All of these items are critical factors in establishing market value.
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