New and events of the Philadelphia Bar Asso.
Issue link: https://thephiladelphialawyer.epubxp.com/i/574228
12 the philadelphia lawyer Fall 2015 T he methods used to value businesses can be confusing and complicated, especially to attorneys without business backgrounds. Yet business valuations are often used in family law, estate law, transactional law and commercial litigation. Effective representation of a client when a business must be valued requires a comprehensive understanding of the methods used to value a business and a basic understanding of valuation tools, such as capitalization rates, discount rates, normalizing financial statements and good will. I interviewed attorney James Griffin, CPA. Griffin regularly values businesses, to help simplify and explain the methodology of business valuations in simple and understandable terms. Julie A. Auerbach: Is different criteria used to value a business for divorce purposes than for other purposes, such as for a sale of the business or for commercial litigation? James Griffin: No. Generally, businesses are valued at the fair market value. Fair market value is defined as "the price at which the property would change hands between a willing buyer and a willing seller when neither is under compulsion to buy or sell, with both parties having reasonable knowledge of the relevant facts." However, the value of a business that relates to a spouse's personal or professional goodwill will not be included as a marital asset for divorce purposes. So very often, the personal or professional goodwill must be separately valued and subtracted from the value of the business. e the three generally accepted methodologies that must be consider The adjusted net worth approach usually compares the tangible asset values to the liabilities of the business to determine the net worth of the business. The asset values are adjusted to their current fair market value, as opposed to their depreciated net value. For example, if the current values of the company's assets are $2,000,000 and the amount of liabilities owed by the company are $750,000, then the adjusted net worth approach would produce a calculation of value of $1,250,000. This approach is most often used in cases where there is little or no goodwill that can be attributed to the going concern value of the entity, or in cases where the business is a holding company, family limited partnership or an entity in a bankruptcy or liquidation proceeding. The market guidelines approach is a method of reviewing sale transactions of similar businesses within similar market areas to determine if there is a correlation of multiples or ratios to the target business being valued. Based upon a review of the market data, calculations may be made to the specific target business being valued to draw correlations and determine the market value of the business based upon similar metrics. For example, if the subject company is a chemical manufacturer, the valuation expert will review several data Dissecting a Business Valuation Understanding Valuations in Client Representations Without a Business Background FINANCE By JULIA A. AUERBACH