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PLEASE READ THE BELOW ESSAY AND WRITE A SUBSTANTIVE 300 WORD REPLY Make Sure That You Are Adding New And Relevant Information With Each This Reply Valuating any business takes time, research, and a
PLEASE READ THE BELOW ESSAY AND WRITE A SUBSTANTIVE 300 WORD REPLY Make Sure That You Are Adding New And Relevant Information With Each This Reply
Valuating any business takes time, research, and an understanding of the nature of the business where the analysts must meticulously examine every facet and aspect of the business. Usually the more in depth an analyst delves into the business, the market, and the external factors, the more accurate and reliable the final valuation number will be in the report. It may seem as though this valuation process is fairly straightforward; as long as the time and effort are put into the process, the valuation will be a valid, reliable determination of the business’s value. This is not the case for every, or even most, valuations. For most valuations there are certain issues that arise or factors that make the valuation process less straightforward and more subjective.
When valuating business’s, there are usually factors that either need to be added to or subtracted from the business’s original value; these factors are called premiums and discounts, respectively. The issue emerges when the premiums or discounts applied are not founded on concrete facts. For example, there are some aspects of a business that are valuation drivers that are not derived from utilizing tangible assets. These factors are abstract ideas like reputation, goodwill, expertise, and trademarks.
Certain businesses are asset intense firms that rely on product sales to drive revenue and value. However, there are other companies, mostly service-based firms, that rely on intangibles to keep them a going concern. When analysts must value professional practices, the analyst’s job can become more difficult. Some examples of professional practices are law firms, accounting firms, dentist practices and medical practices. Because professional practices are service-based companies, their value is driven by intangible assets (Hitchner, 2017). The very nature of intangibles makes it difficult for analysts to put a value on these assets and even define at times. This can be analogous to defining an abstract term like justice; Plato wrote a whole book dedicated to defining that one concept in The Republic, which provides further evidence that intangibles are difficult concepts to grasp, let alone value.
Currently on the market is a personal injury law firm that is valued at $4,500,000 in Florida. The question arises how the valuation analyst concluded the law firm was worth that much. The website says, “with a strong reputation, support staff, and well-developed processes this is an incredible opportunity to acquire a Florida based law firm with the ability to expand and scale the current operations” (“Practices for Sale,” 2018). This statement gives a hint why the firm was valued at that price; the reputation, support staff, well-developed processes, and the scalability of the law firm are all value drivers. As noted previously, the law firm is a professional practice which is a service-based organization and explains why the value drivers are all intangibles. The word reputation can be another name for the goodwill the law firm exhibits. Goodwill, defined by one legal dictionary, is an intangible asset that provides an advantage or benefit beyond the mere value of its capital stock or property (“Goodwill,” 2018).
Not only is defining and agreeing upon one definition of goodwill difficult (there are numerous definitions of goodwill that exist), valuing it is difficult as well. Goodwill can be subdivided into two attributes, personal and institutional goodwill. Personal goodwill is not considered in the valuation of a firm because it is not usually transferable to the next purchasing entity (Hitchner, 2017). Once the person leaves the firm, that person’s goodwill leaves with them in a sense. Institutional goodwill is included in the valuation of a practice and includes the goodwill of the firm as a whole. Examples of institutional goodwill are intellectual property owned by the practice, locations of the firm, effective workforce, overall practice reputation, and referrals to the entire practice (“Special Considerations,” 2018). The next issue arises in how to distinguish between personal goodwill (not included in valuation) and institutional goodwill (included in valuation). Then how much value to give the firm for the institutional goodwill is the next issue that needs to be resolved. A common method to valuing goodwill is an earnings multiplier, but it is still a subjective process (Berson, 2015). This subjectivity is an issue when valuing professional practices like the law firm in Florida.
When valuing businesses and in every area of life, people should consider Colossians 3:23-24 (ESV) which states, “And whatever you do, do it heartily, as to the Lord and not to men, knowing that from the Lord you will receive the reward of the inheritance; for you serve the Lord Christ."
References
Berson, S. A. (2015, March). Valuing and selling a firm takes time, matchmaker skills. Retrieved from http://www.abajournal.com/magazine/article/valuing_and_selling_a_firm_takes_time_matchmaker_skills
Goodwill. (2018). Retrieved from https://legal-dictionary.thefreedictionary.com/goodwill
Hitchner, J.R. (2017). Financial Valuation: Applications and Models. John Wiley & Sons Inc.
Practices For Sale. (2018). Retrieved from https://thelawpracticeexchange.com/listings-sale/
Special Considerations in Valuing Professional Practices. (2018). Retrieved from https://www.steinsperling.com/about-us/resource-center/special_considerations_in_valuing_professional_practices
