As a business owner, you’ll likely need to have your company appraised at some point. Appraisals are essential in the event you decide to sell or merge the business, create or update a buy-sell agreement, or devise or refine your estate plan. A good way to preempt the uncertainties of the appraisal process is to learn some basic valuation terminology. Here are seven terms you should know:
Fair market value. This is a term you may associate with selling a car, but it applies to businesses (and their respective assets) as well.
Going concern value. This important valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a business that’s expected to continue operating in the future.
The asset (or cost) approach. One of three common approaches that appraisers use to value businesses, this approach essentially calculates a company’s worth by adding up its assets net of liabilities.
The income approach. Another one of three common approaches to valuing a business, the income approach derives a company’s value from its anticipated economic benefits.
The market approach. Yet another one of three common approaches to valuing a business, here an appraiser uses one or more methods that compare the subject company to similar businesses, business ownership interests, securities or intangible assets that have been sold.
Valuation premium. Sometimes, because of certain factors, an appraiser must increase his or her estimate of a company’s value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a “premium.”
Valuation discount. In some cases, an appraiser needs to reduce his or her value estimate based on specified circumstances. The reduction amount is commonly referred to as a “discount.”
