When I start a business valuation engagement, I ask my clients for a lot of information. The amount of information is kind of like what a buyer would need when they’re assessing another company before they buy it. Sometimes, clients get a bit hesitant and wonder why I need so much stuff.

To figure out how much a business is worth, I put myself in the shoes of a potential buyer. Basically, I’m answering the question: How much would someone pay for this business? In that sense, a valuation is like the price tag someone would put on your company. No matter which valuation approach I use, that price tag is the main thing I’m trying to find out.

I generally start my engagements working out the Fair Market Value, which really defines some of the key factors in the valuation. Even if I use one of the other ways to look at the business value, these factors are also present.

Fair Market Value

Fair Market Value is defined as an estimate of the price, expressed in terms of cash equivalents, at which the business would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s-length, in an open and unrestricted market, where neither party is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. So, the Fair Market Value is the price the business would be worth on the open market if it were listed for sale and sold externally.

In the real world, there are some provisos to the Fair Market Value definition. If you are selling, you usually need to help the buyer transition the business and get up to speed, and agree to non-compete terms. Sometimes, the deal requires you to stay with the business for a longer period after selling, and you should get paid for that work. This makes the deal more valuable you.

I usually make the assumption that the business is being valued as a going concern, and/or the assets are valued at their highest and best use – the most beneficial way to use and price the assets of the firm.

To value a business, I need to be considering the whole gamut of factors that could apply. I need all that detailed info to really get to know how your business works.

And More Information…

I ask for the basics at the outset of the engagement, but sometimes I need even more info. At the beginning, I don’t always know what’s important for your business until I dig deep into the numbers and talk to the key people involved. I will never have all of the possible information, of course. Hopefully I get enough.

Someone smart once told me that ‘A business valuation is essentially a well-educated guess.’ That’s pretty accurate. But remember, the more I understand your business, the better my guesses will be.