Having performed business valuations for a variety of purposes, I have been asked a number of questions from clients. The following top ten business valuation questions have been compiled in an effort to briefly address some of the most frequent concerns clients have regarding a business appraisal.

1. What approaches do you consider in valuing the business?

Income Approach-The Income Approach derives an indication of value based on the sum of the present value of expected economic benefits associated with the company. Under the Income Approach, the appraiser may select a multi-period discounted future income method or a single period capitalization method.

Market Approach-The market approach derives an indication of value by comparing the company to other similar companies that have been sold in the past. Under the market approach, the appraiser may utilize the guideline publicly traded company method or the direct market data method.

Asset Approach-The Asset Approach adjusts a company’s assets and liabilities to their fair market values and adds to the value of intangible assets and any contingent liabilities.

2. What discounts may be applicable?

The discounts typically used in the valuation of a closely held business interest include a discount for lack of control, discount for lack of marketability, discount for lack of voting rights, blockage discount, portfolio discount, and key person discount. The most common discounts applied in business valuations are discounts for lack of control and discounts for lack of marketability.

3. What are the standards of value?

For most operating businesses, the standard of value will likely be fair market value, fair value, or investment value.

Fair Market Value is the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant fact.

Fair Value is a legal standard of value that has been established by the courts for use in issues ranging from marital dissolution to dissenting shareholder suits.

Investment Value is the value to a particular investor based on individual investment requirements and expectations. Investment value is typically used for transactional purposes when an acquirer is assessing the value of the target company, including the potential synergies of the deal.

4. What is the difference between an appraisal and a fairness opinion?

Full/formal business valuations typically consider all relevant approaches and methods that the appraiser considers appropriate in determining a value. These valuation reports typically include research on the subject company’s industry, economic conditions, trends, etc.

Fairness opinions provide the expert’s opinion of whether the proposed value of the transaction is “fair” for the shareholders. Fairness opinions do not typically provide an estimate of value or value range.

5. What are the main credentialing bodies for business valuation, what designations do they offer, and what designations have you earned?

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