The value of a business interest is generally based on two things:
- What the company owns, which is reflected in the balance sheet; and
- What the company earns, which is reflected in the income statement.
Try our free interactive business valuation calculator to get an estimate for the Net Present Value (NPV) of your company.
The IRS is guided by the factors set forth in Revenue Ruling 59-60 in valuing a business for tax purposes, including:
- The nature and history of the business
- Economic outlook
- Book value of the stock
- Earning capacity of the company
- Dividend paying capacity
- Goodwill and other intangible values
- Prior sales and size of block
- Similar companies
Some of these factors will carry more weight in the valuation than others. There is no exact mathematical formula that can be applied.
A study by Standard Research Consultants showed that in 74 tax cases, the most frequently used factors were:
- Sale price in 33 cases
- Book value in 24 cases
- Earning power in 17 cases
Earnings typically have more importance in companies selling products and services, whereas net worth will be more important in real estate holding companies.
Hart Financial offers Business Valuation Planning for almost any small business. We can also help you sell your business when you are ready. Please contact us with your questions.
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