Why do most business owners want to know about the value of their business? This question is not intended to be flip, but it is one that needs to be answered. Of course, there is the curiosity factor, but there is usually something behind that wanting-to-know. Does an owner need to know for estate purposes? Does the bank want to know for lending purposes? Is the owner entertaining bringing in a partner or partners? Is he or she thinking of selling? Is a divorce or partnership dispute occurring? Is it for a buy-sell agreement? There are many reasons why knowing the value of the business is important.
The reason for the valuation is critical. For example, in a divorce or partnership breakup, each side has a vested interest in the value of the business. If the husband is the owner, he wants as low a value as possible, while his spouse wants the highest value. The departing partner wants as high a price as possible. If an owner is selling half of his business to a partner, he or she would want as a high a value as possible. In the case of a business loan, a lender values the business based on what he could sell and thus recapture the amount of the loan. This may be just the amount of the hard assets, namely fixtures and equipment, receivables, real estate, or other similar assets.
In almost all cases, with the possible exception of the loan value, the applicable value definition would be Fair Market Value. It is normally defined as: “The price at which the 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, both parties having reasonable knowledge of relevant facts.” This definition is used by most courts.
It is interesting that the most common definition of value begins with the phrase “The price…” Most business owners, when using the term “value,” really mean price. “How much can I get for it if I decide to sell?” If there are legal issues, a valuation is most likely needed. In most cases, however, what the owner is looking for is a price. Unfortunately, until the business sells there really isn’t a price.
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- Indy Business Broker
- Noblesville, Indiana
- With over 16 years of business ownership, management and sales, Dave understands the needs of both buyers and sellers in confidential business transactions. As a former owner of a mortgage company, he also brings a unique perspective of the financing aspect of deal making. Since joining Sunbelt in 2004, Dave has represented a variety of companies in such industries as service, distribution and manufacturing. Dave has a reputation for successful transactions and consistently receives compliments from both buyers and sellers for his diligent work and adding tremendous value to the transaction process. In 2010, Dave successfully completed the necessary courses and requirements to be designated a Certified Mainstreet Business Broker (CMSBB). Dave’s education and experience includes: Indiana State University (Business Management), Indiana State (Securities Division) and Mortgage Brokers License (8 years). In his spare time, Dave and his family: Angela, Jayden (14) and Kade (12) enjoy family vacations and traveling, sporting activities and their local church. Contact Dave at 317.218.8626 or cell at 317.508.6690 dgorman@sunbeltindiana.com
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