In Your Business Valuation, What “Interest” is Being Valued?

When most people think of business valuation they think of valuing the business or company as a whole.  Yet, often only specific components of the business ownership need to be valued.

These components are called business Interests.

Different business interests have different rights and therefore may have different values.  Interests can include an individual shareholder’s interest (for example, a 5% common stock interest) or class of stockholders interests where there are multiple classes of stock (preferred stock or common stock), a debt obligation owed by the company, convertible debt, and other variations.

When a specific business interest is being valued it is important to understand the rights and restrictions of all other interest owners in order to properly value the business interest.

Often an operating agreement or shareholder agreement will restrict rights of some owners and give rights to others.  That too acts to increase or decrease value.

Different interests will have different rights to control the company including appointing officers, directors, setting salaries and the like (generally control owners).  Minority owners are non-control and do not have the ability to set these type of policies and terms.  Clearly control stock is more valuable than non-control.  In fact minority interests can even be unmarketable or completely unable to sell their stock further reducing the value.

To find the correct value of the business interest, it is important to understand the interest being valued and the rights available to that interest owner and other interest owners.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.