Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business

CHAPTER 14 BUSINESS VALUATION AND HARVESTING

14.1 What is Business Valuation?

Business valuation is one of the essential tasks to undertake for many reasons. It would be necessary to know a current and reliable value for the firm in cases of financing, selling, or merging the company, as well as in cases of selling stock to employees, harvesting, and even when making charities. Firm valuation is also required by both federal and state authorities, not only for tax purposes but also for a myriad of reasons such as the cases of inheritance, property transfer, antitrust problems, partnership disputes, divorce, liability suits, and going public.

The usual element in the context of value would be the dynamic relationship between the overall return and the risk involved. This relationship is very much related to numerous dimensions such as the business performance, its sales, revenue, profits and the rate of their growth, assets, liabilities, cash flow, capital, and the external environment of market, suppliers, competitive forces, threats, and customer base.

Business value is usually influenced by many business-related factors such as:

• type of business and industry;
• size and performance;
• history, current, and projected state;
• development stage and growth rate;
• management and control;
• business statistics (assets, liabilities, revenues, profits,…, etc.);
• reason of valuation.

Valuation of a business would eventually come down to assessing the ability of the business to generate cash ...