What Does a Business Valuation Expert Do?

Terry Masters

A business valuation expert determines how much an owner's interest in a closely-held business is worth without having to actually sell the business on the open market to establish a sales price. It is not an exact science, and the only way to know the true value of anything is to see what it sells for under free market conditions. The expert uses an economic model that takes into account key business features and personal judgment to arrive at an opinion regarding what an owner's interest would be worth under prevailing circumstances if it were sold.

A business valuation expert is often hired one owner of a business needs to buy out another without actually selling the business.
A business valuation expert is often hired one owner of a business needs to buy out another without actually selling the business.

It is relatively easy to establish the value of a person's interest in a public corporation. A person's ownership interest is represented by the number of shares of stock he holds, and the price for an individual share is set by trading on the stock market. Multiplying the number of shares owned by the selling price of a share on a particular day will provide an exact valuation that can be relied upon in most instances. Companies that are not publicly traded have a much more difficult time establishing the value of ownership interests.

One of the overarching maxims of a free market economy is that an item is only worth what people are willing to pay for it. Establishing value without using sales data is a judgment call that requires expert analysis of factors that will likely affect the sales price. A business valuation expert is hired to make that analysis, usually when one owner needs to buy out another without actually selling the business.

The most common situations where a business valuation expert will be required is in divorce cases, business disputes between owners, and structured buyouts where no sales price was set as part of the agreement. In a divorce, the court needs to know how much a spouse's interest in a business is worth so an equitable distribution of marital assets can be made to the other spouse. The spouse who owns the business might not want to sell it to establish that value, so an expert will be hired to make a determination that the court will use in lieu of an actual sale.

A business valuation expert uses an income, asset, or market approach to valuation. These three economic models combine standard financial computations with the expert's judgment on intangible conditions, such as risk and growth potential. The expert reviews the financial statements of the company, makes an assessment of the tangible assets, and considers the market conditions where the company is located. He produces a written report that presents computations, findings, and conclusions. Occasionally, he will have to defend his valuation methods and conclusions if his report is challenged by an interested party.

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