Valuation
Business Valuation
The process of estimating what a business or ownership interest is worth — using income, market, and asset approaches, for purposes ranging from sale to tax to divorce.
Valuation answers 'what is it worth?' with a defensible method rather than a guess. Professional appraisals draw on three approaches: the income approach (DCF and capitalization of earnings), the market approach (multiples from comparable companies and transactions), and the asset approach (what the underlying assets would fetch). The appraiser reconciles them into a conclusion.
Purpose drives the answer. The same business can carry different supportable values for a sale negotiation, a gift or estate tax filing (where DLOM and DLOC discounts reduce the value of minority interests), a buy-sell agreement, an ASC 718 stock-comp grant, or a divorce — because each context defines value differently and permits different discounts.
For owner-led businesses, the recurring valuation moments are: gifting shares to the next generation, setting buy-sell agreement prices, admitting or buying out a partner, equity compensation grants, and preparing for a sale. Getting a credentialed appraisal (ABV, ASA, or CVA) matters most when the IRS is the audience — estate and gift filings with DIY valuations invite challenge.
Common pitfalls
- Using a rule-of-thumb multiple for a gift or estate filing — the IRS requires a qualified appraisal, and penalties apply to substantial misstatements
- Letting a buy-sell agreement reference a stale or formulaic value — funerals are the wrong time to discover the formula produces an absurd number
- Assuming the valuation for one purpose transfers to another — a bank's collateral value, an appraiser's fair market value, and a strategic buyer's price are different numbers
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