Chapter 3

Understanding the Tangibles and Intangibles of Business Valuation

In This Chapter

Examining the reason for valuation

Introducing standards of value and how they’re used

Adjusting the numbers

Mixing science and skill in the valuation process

In business, there’s so much talk about the bottom line and the irrefutable truth of numbers. So why, then, isn’t business valuation an exact science? Because the everyday competitive environment in which businesses operate is in a constant state of change. The economic tide that lifts all boats can sink them tomorrow. And overnight, unexpected world events can make a difference in the smallest business fortunes — just witness the economic downturn triggered by the September 11 attacks in 2001.

In good economic times as well as in bad, innovation and ideas are the toughest elements to measure because no one can foresee when an entire marketplace will respond to one great idea. Perhaps Steve Jobs had an inkling of how big the iPod was going to be, but at the turn of the 21st century, much less a generation before, few people understood how popular personal digital electronics would become.

Business valuation is as much an art as it is a science because numbers alone can’t be trusted — successful valuation involves an understanding of business financial documentation as well as a nose for news and activities considerably more stinky. And a certain amount of gauging the risk in any business is subjective. In many ways, businesses are ...

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