While Link and Boger cover the mechanical science of business valuation, they also concentrate on the intuitive art of valuation, emphasizing the distinction.
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Business valuation is an industry within business services. There are firms that specialize in business valuation. They will either represent the owner trying to sell or, sometimes, the buyer who wants to make sure they are paying a fair price. Business valuation is an expertise that takes years to develop.
Many of these experts come from the accounting or finance side of business services. So how do they do it?
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Business valuation is both an art and a science. There are many factors that go into developing the value of a business.
They fall into two main groups, tangible factors and intangible factors. Each value is weighed based on how it affects the business performance, and what can be expected of the subject business going forward.
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Remember, a buyer is buying the ability to make money from the existing business. Tangible factors are easier to value. This is where the science of the valuation takes place. Tangible factors can be looked up or calculated. They include cash in the bank if that is part of the deal , accounts receivable assuming they are collectable and inventory assuming it is saleable. Other tangible factors include revenue produced over time, buildings owned by the business that are included in the sale, cash flow, obligations to employees such as retirement plans, etc.
Also included in this value are items that would decrease value such as losses, poor margins, or debt that will be assumed in the transaction.
The discussion of intangible factors is where the art of business valuation becomes part of the equation. Financial Shenanigans, Fourth Edition: From 0 to Properties in 3.
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