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BUSINESS VALUE vs. UNDERLYING ASSETS

Can you value a business without appraising the underlying assts? The answer is yes. In fact, most business valuations are not all premised upon any specific asset values.

Think of a business or enterprise valuation as the circumference of a ball (soccer, basketball, etc.). All of the assets – current, IP and fixed – are inside the ball. These assets are necessary to the operation of the business, the going concern. Thus, the business valuation assumes that certain of these assets are viable and contribute to overall enterprise value. Yet, unless there is a specific reason to also isolate and appraise these assets, it is not a necessary exercise.

What are the reasons which compel or suggest that individual assets should also be valued? The most prevalent ones follow:

  1. A business sale – if treated for tax purposes as an asset sale, the process is an allocation of the purchase price. Each of the fixed and IP assets should be appraised at fair market value. Thus, a new depreciable basis is established. Any remaining value over and above these asset values is the residual or goodwill of the enterprise.
  2. An asset sale – similar to the above, where the buyer can assign market value to each asset for future depreciation. Often, this "new" balance sheet" is reflecting IP value for the first time, since internal costs to create IP are normally expensed and not capitalized.
  3. Corporate form converted from a C to S (or LLC) – a business valuation is needed for the new "form". Optimally, the assets are also valued for these reasons:
  4. Accurate calculations of gain or loss are made when individual assets are disposed or sol
  5. IP value can be placed on the balance sheet to show potential buyers
  6. In a Chapter 11 bankruptcy when the court requires both going concern value and orderly/forced liquidation values for the assets. This latter analysis should reflect a Chapter 7 shutdown of the business; it sets a parameter for determining how various debtors might be paid if the business no longer exists.
  7. Asset transfer from one corpus to another, each with some common shareholders. While the goal is to minimize value to avoid taxes, the value(s) must be supportable.
  8. Transfer pricing studies (IRS Section 482) may involve the value of IP transferred overseas and a supportable royalty rate charged between related entities.
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