CHAPTER SEVEN
The Essentials of Business Valuation
INTRODUCTION
What Makes Business Valuation a Unique Challenge
Most people’s experience with valuation is limited to getting an appraisal on specific assets, such as real estate, a vehicle, or jewelry. These inanimate objects frequently are traded in a reasonably active market and there are often simple, reliable data available on recent sales of similar items. Although exceptions occur, appraising or valuing (the terms can be used interchangeably) these assets is not overly complicated, and the results are not subject to wide variation or difference of opinion.
Valuing a business is far more complex. Investors may purchase a minority or controlling interest in a business, either of which can convey a wide variety of rights and restrictions on those rights. The interest could be securities in a publicly traded company for which there is an active market and indications of value readily available, or interests in a closely held business—C corporation, S corporation, limited liability company, or partnership—for which little or no market may exist. Investors usually buy companies to acquire the anticipated future returns of the enterprise. They must estimate the risk involved in their investment and the future returns they expect to receive. The business may own a wide variety of assets that may or may not ...
