October 2023
Question: Can’t I just use the
book value of the stock of my company when I gift
shares to my children?
Answer: No, book value is an accounting
convention. It does not represent “fair
market value”, which is the standard for the
valuation of shares of stock for gifting
purposes. Fair market value can be higher,
lower, or the same as book value. You need
an appraisal, preferably as of the date of the
gifts on a fair market value basis.
Question: How long is a business
valuation good for?
Answer: The quick answer is a
business valuation conclusion is good until
it isn’t. Technically, a business
valuation is only good for
the “as of” date in the report.
However, on a practical basis the
value conclusion remains valid until something
happens that changes the value. This
change could be many things such as a new
earnings report, a change in the industry
outlook, the addition or loss of a major
customer, or the loss of a key person. We
recommend discussing this question with the
business appraiser before using the concluded
value for any date other than
the “as of” date.
Question: Can I use publicly-traded
market multiples to value my small business?
Answer: Yes, you can use
publicly-traded market multiples to value a
small business. However, you may need to
make a number of possibly substantial
adjustments. One typically large
adjustment would be to take into account the
much higher risk for a typical small business
compared to a much larger publicly-traded
company. Another would be for the fact
that publicly-traded company stock prices
normally represent minority interests that
sell at a price lower than for a controlling
interest. Still another adjustment would
be for the differential in
marketability. These
adjustments would be in addition to
other typical adjustments made in valuing
a business.
Question: My company generates
higher than industry average profit
margins. Doesn’t this mean it
should have higher
than industry average valuation market
multiples?
Answer: Many factors play into the
appropriate valuation market multiples, so one
factor, such as relatively high profit margins
probably wouldn’t control the level of
valuation market multiples. In fact, higher
than industry average profit margins may be a
sign of higher risk in that competitors could
undercut the prices of similar products or
services and still have average profit margins.
This actually could cause the valuation market
multiples to be lower than the industry average,
but it really depends on whether or not the
relatively high profit margins are expected to
continue or not.
Relevant Court Cases
-
John L. Van Horne III, et al. v.
Zohar Ben-Dov et al.,
Supreme Court, New York County,
No. 2021-02156 2023-00252,
decided October 12, 2023
-
In Re the Marriage of Todd Allex McCreedy
and Theresa Rene McCreedy,
Court of Appeals of Iowa
No. 22-0657,
filed September 13, 2023
Recent Business Valuation Articles
-
“A More Intuitive Formula for the
PEG Ratio,”
by Leo H. Chan,
posted October 9, 2023
-
“A Note on Generalised Residual
Income Valuations,”
by Dr. Marco Realdon,
dated August 24, 2023
Recent Engagements
- Valuation of the non-voting common
stock of a specialty manufacturer on a
minority interest basis for gift
tax reporting/sale purposes.
- Valuations of various interests in
mostly real estate holding companies
on minority interest bases for estate
tax reporting purposes.
- Valuation of 100% of the
common stock of a niche fulfillment
and logistics services company on a
controlling interest basis for
planning purposes.
- Consulting regarding a specialized service firm
on a controlling interest basis for
planning purposes.