September 2020
Beginner
432 pages
9h 15m
English
Content preview from The Art of Business Valuation
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CHAPTER 1What Is My Business Worth?
In theory, the value of a business or an interest in a business depends on the future benefits that will accrue to it …
—Shannon Pratt, Valuing a Business, 4th Edition (New York: McGraw-Hill, 2000)
What is my business worth? This is the essential starting point for business valuation.
VALUE IS NOT PRICE
Price is what someone is willing to pay for the business. Price includes the quality of the sales process, negotiation, emotion, economic demand, timing, luck, and financing. Price for private businesses often includes terms with post-closing price adjustments based on continued business performance or adjustments due to failures of representations and warranties. These terms are hard to translate into useful data. There are no mechanisms to determine downstream what actually gets paid for earn-outs and seller notes.1 There is no verifiable data on how often representations and warranties result in post-closing price adjustments. The importance of emotion in the sales process cannot be overstated. It takes tremendous energy to buy or sell a business. This is diametrically opposed to the valuation process.
VALUE IS …
Valuation consists of applying established analytical methods and preset assumptions to what is known or knowable about a company in order to estimate its value as of a specific date. These assumptions rarely resemble real-world sales situations. Value and valuations are useful for sale and exit planning discussions but ...
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