5 Valuation Terms for Business Owners to Know

Whether or not you’re thinking about getting your company appraised, it’s a good idea to brush up on commonly used valuation terms

Why would you need a valuation? As a business owner, you’ll likely need to have your company appraised at some point. An appraisal is essential in the event of a business sale, merger or acquisition. It’s also important when creating or updating a buy-sell agreement or doing estate planning. You can even use a business valuation to help kickstart or support strategic planning.

A good way to prepare for the appraisal process, or just maintain a clear big-picture view of your company, is to learn some basic valuation terminology. For a detailed glossary of valuation terms, check out the National Association of Certified Valuators and Analysts’ International Glossary of Business Valuation Terms when you have time. At a minimum, every business owner should know at least these five terms:

1. 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. In a valuation context, “fair market value” has a long definition:

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

2. Fair Value

Often confused with fair market value, fair value is a separate term — defined by state law and/or legal precedent — that may be used when valuing business interests in shareholder disputes or marital dissolution cases. Typically, a valuator uses fair market value as the starting point for fair value, but certain adjustments are made in the interest of fairness to the parties.

For example, dissenting shareholder litigation often involves minority shareholders who are “squeezed out” by a merger or other transaction. Unlike the “hypothetical, willing” participants contemplated under the definition of fair market value, dissenting shareholders are neither hypothetical nor willing. The fair value standard helps prevent controlling shareholders from taking advantage of minority shareholders by forcing them to accept a discounted price.

3. Going Concern Value

This valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a company that’s expected to continue operating in the future. The intangible elements of going concern often include factors such as having a trained workforce; an operational plant; and the necessary licenses, systems and procedures in place to continue operating.

4. Valuation Premium

Sometimes, because of certain factors, an appraiser must increase the 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.” For example, a control premium might apply to a business interest that possesses the requisite power to direct the management and policies of the subject company.

5. Valuation Discount

In some cases, it’s appropriate for an appraiser to reduce the value estimate of a business based on specified circumstances. The reduction amount is commonly referred to as a “discount.” For instance, a discount for lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect that interest’s inability to be converted to cash quickly and at minimal cost.

DSB Rock Island’s Valuation Team is a Great Resource

With over 60 years of experience counseling family-owned, small- and mid-sized businesses, DSB Rock Island meets your needs for business transactions, M+A or due diligence with the right team of specialized accountants, consultants, tax advisors and valuation specialists.

A certified business valuation can clarify your best path forward and help you objectively understand the fair market value of your business. Depending on your objectives and the level of detail needed, a valuation consulting can be a more cost-effective alternative to a full valuation opinion while giving you the insight needed to plan for a future sale or acquisition. We will provide you with the appropriate valuation services and counsel for your unique personal goals.

Connect with Sean Boland to discuss your valuation needs.