How a Business Is Valued: USPAP, the Three Approaches, and Discounts
In our latest short video, Adam T. Magill, MBA, CBA, CVA, MAFF, walks through the professional standards and the steps behind every business valuation.
It starts with USPAP
Business valuations follow the Uniform Standards of Professional Appraisal Practice, or USPAP for short. USPAP was created in the late 1980s after the savings and loan crisis, when Congress established The Appraisal Foundation and tasked it with setting standards for the proper methodology and approaches for valuing privately held assets, from cars and jewelry to houses and businesses. The standards are updated every two years, and Standards 9 and 10 apply specifically to interests in privately held companies.
Three approaches to value
Standards 9 and 10 explain that there are three approaches to value:
The asset approach
The income approach
The market approach
Each approach includes several methodologies. We apply the methodologies appropriate to each approach and then perform a reconciliation of value to arrive at a conclusion.
Discounts and premiums
The reconciliation of value comes after applying the discounts or premiums appropriate to the particular interest being valued. The most common include:
Minority interest discount: for an ownership interest of 50% or less.
Control premium: for an ownership interest of 50.1% or more.
Discount for lack of marketability: a fancy term for the fact that what you own is stock in a privately held company, not a publicly traded one, and there is time and cost involved in selling a privately held company. The valuation has to account for that difference.
Goodwill and a plan for distribution
When presenting in court, we can also address whether goodwill is entity (enterprise) goodwill or personal goodwill. In a shareholder dispute or a family law case, we can ultimately recommend a plan for distribution: the most appropriate way of handling the business based on the valuation.
Learn more
Read more about our business valuation services, subscribe to Adam's YouTube channel for new videos, and visit collaborate-florida.com for collaborative divorce and family mediation.
This post and video provide general information only and are not legal, tax, or investment advice. Cover photo by Towfiqu barbhuiya on Unsplash.
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