How the Economy Impacts the Value of your Business

If you own or co-own a privately held business, I’m sure you’ve wondered just what your business was worth. In other words, what would a willing and informed buyer pay you for your business? Maybe you’re thinking of selling, doing some estate planning or going through a divorce. Although your interest in the business isn’t actively traded on a stock exchange, your business probably still has a value. CPA’s with special training and experience in valuing businesses can work with you to determine a value for your business.

Businesses have value because they make profits or own valuable assets such as real estate or securities. Some businesses have developed special processes and expertise or products that are protected by patents. If it’s likely that your business and its assets have a bright future, then your business has value.

A business appraiser does a thorough analysis of your company’s profitability, assets and liabilities and computes its economic profit. The appraiser also considers the economic conditions as well as the prospects for the industry. Since profit is the typical driver of economic value for an operating business, the appraiser needs to make some judgments about the reported revenue and expenses to arrive at an economic profit that can be passed on to a willing buyer. Whenever there is a return, there must be something of value creating that return.

There’s another important question that the appraiser needs to answer. What rate of return does a buyer expect before assuming the risks associated with owning a privately held business? If a very safe investment such as a Certificate of Deposit or a Treasury Note is paying 2 to 4%, a more risky investment, such as one in a privately held business, should pay a higher rate of return. To accept more risk, the investor wants the potential for a higher reward. Knowing the return or reward and the acceptable rate of return allows the appraiser to assign a value to the business.

In either case the value of your business doesn’t have to remain a mystery. There are proven techniques that specially trained appraisers can use to answer the question, “What is my business worth?