Valuation Myths vs. Facts

MYTH 1. "RULES OF THUMB." They are of no significant value as there are many variables that do not take into account the exigencies of each business. They are really only a guideline and in using the rules of thumb, you are probably undervaluing your corporation. For example, the value of medical practices can range from 40% to 125% of revenues for the equipment, supplies and goodwill. Referral practices are near the low end and continuing patient base practices towards the high end. Different areas of the practice, different states and different specialties can change the value considerably. In addition, the asset base, income approach and market approach need to be taken into consideration.

MYTH 2. A competitor sold his business for three times his revenues and my business is worth the same. Total fantasy and it probably had little relevance to the value of your business. The value of your business is dependent on many factors that may not relate to the other business sold. For example, a long-term lease at a rental lower than the market value increases the profitability of your business and accordingly increases its value.

MYTH 3. The purpose if the valuation may not necessarily mean what the business is worth in a sale. The IRS under Revenue Ruling 59-60 has determined that the Fair Market Value of a business is what a willing buyer would pay and a willing seller would accept, when all parties have reasonable knowledge of the relevant facts and neither is under any compulsion to buy or sell. The valuator needs to know the purpose of the valuation. "Different methods will provide differing values and a different valuation" Paul B Baron. There may be a Fair Market Value range but the wider the range the more the IRS and a buyer will question the value.

MYTH 4. If your business is loosing money, it may not have a value. This is probably false because an experienced business valuator will carefully scrutinize the financial historic and after in-depth discussions with the shareholders, may be able to add back certain legitimate expenses and be able to show the true cash income. An experienced valuator will likewise scrutinize the value of assets that have been legitimately expenses in the past in terms of IRS regulations and be able to re-evaluate the asset value much of which may not be apparent on the balance sheet. This would probably show an increase in the profitability and of the assets that could show a positive value to the business.


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VALUATION MYTHS & FACTS

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