Shenehon Company's Business Valuation Department provides analyses for both operating and holding companies, including controlling and partial interest valuations. Assignments include valuations for estate and gift tax purposes, allocations of purchase price, ESOP planning, franchise rights, business damages, patent and royalty rights, and the valuation of asset and portfolio holdings.
With respect to business valuation, we use the same three approaches to value as we do for real estate, but there are some additional pieces to consider during the valuation process.
In the case of stock ownership of a publicly owned actively traded corporation, the market value of that ownership is a known quantity at a given point in time (i.e., the public market exchange price). The market values of publicly owned corporations represent the collective judgment of actual and potential buyers and sellers of a given stock.
In the case of stock ownership in a privately owned and/or inactively traded company, the market value cannot so readily rely upon the collective judgment of buyers and sellers, in a given stock, as the basis of valuation. For such companies, the accepted techniques of valuation analysis found in I.R.S. Revenue Ruling 59-60 include eight primary factors. These factors, although not all inclusive, require careful analysis:
In our valuation methods, we consider all of the relevant factors. Additionally, we interview the management team, visit the subject's main location, review financial statements for the past five to eight fiscal years, consider market data pertaining to the industry, and other pertinent factors which may apply to a specific appraisal analysis. Finally, each of the above methods and considerations is evaluated for reasonableness, consistency, and its relative merits in the determining the final appraised value estimate.
For business valuation appraisal purposes, the market value of 100% ownership of a business enterprise is defined in accordance with I.R.S. Revenue Ruling 59-60 as:
"the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts."
Court decisions frequently state, in addition, that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.
When valuing a minority ownership interest, we first determine the market value of a 100% ownership interest. Once a 100% ownership interest market value is determined, the appropriate adjustments (discounts and premiums), are taken to reflect minority positions.
The appraiser arrives at 100% market value by adding the market values the assets of each ownership unit and subtracting the liabilities of each ownership unit. The market value of each of the component assets is determined separately and, in general, represents a cash equivalent value that is realizable within a period of one to two years typically for a real estate component with significantly less time for the marketable securities and cash.
From the 100% ownership interest net market value, we then examine all discounts which may pertain to the limited partnership interest to determine if minority and lack of marketability discounts are applicable.
