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Valuation work is never a one-size-fits-all proposition. It can be both quite varied and necessary for different business procedures.

A valuation is needed when a family wants to transfer shares in a privately held company to the next generation in a gifting transaction. It is also necessary when a business owner passes away and an estimate is needed for the value of the shares that are passing to the estate.

For all estate, gift and income tax purposes, you are required to estimate the value of the ownership interest in accordance with Revenue Ruling 59-60, which effectively calls for analyzing value from the perspective of a hypothetical buyer or seller.

Numerous considerations

Because the buyer/seller is hypothetical, we don’t build in specific synergistic effects. We assess value from the perspective of a financial buyer that is not likely to make significant changes to the company’s operations. We also consider the concepts of lack of control and lack of marketability in estimating value in accordance with Revenue Ruling 59-60, because the company is not publicly traded and it will take time and effort to gain liquidity in the ownership interest.

If a client comes to me for assistance with a valuation for a buy-sell agreement, I will value the company according to the terms of the agreement. Buy-sell agreements can have very specific terms about how the owners agreed to value the shares of the business. They may be seeking a very conservative estimate of value, a very aggressive estimate or something in between. If a shareholder is fired for cause, then the valuation estimate may be very conservative. On the other hand, if a shareholder passes away, the agreement may call for a more aggressive estimate of value.

An effective planning tool

Clients often come to me for planning purposes as well. They may want to estimate the value of their business in contemplation of a sale of the company, or to analyze value-creation performance. In these cases, we analyze the company from more of a market perspective, and take into consideration specific things that a buyer may or may not do with the business. We try to identify inefficiencies in operations, balance sheet management or capital structure. We take a broad view of the company to try to find ways to help management maximize, or at least increase, the value of the company.

If the job is to value a business for litigation purposes, we have to take into consideration requirements that the judge may have put in place and any requirements that are specific to state law or federal law regarding the case.

A fluid process

Those in the dealmaking world – specifically investment bankers – understand valuation principally as a market-driven concept, and are always pushing to find the best result possible under current market conditions. Sometimes market conditions improve when they are marketing a deal, and other times they deteriorate. A good investment banker always has his or her finger on the market’s pulse, and builds that knowledge into their efforts to create a fair, accurate and current valuation estimate.

Ronald D. DiMattia is founder and president of Corporate Value Partners Inc. He has significant experience with acquisitions and divestitures of businesses, business units and product lines; placements of debt financing; detailed analysis of financial information; development of forecasts and projections; and valuations of businesses. He can be reached at (216) 741-1330 or ron@corporatevaluepartners.com