59318
BUSINESS
VALUATION
Michael A. Crain
It has been said that determining the value of an investment in a closely held
business is similar to analyzing securities of public companies. The theories are
similar and not overly complex on the surface. There are even Web sites that
proclaim to be able to value a private business. But like so many things in the
business world, the devil is in the details. The valuation of a closely held busi-
ness depends on many variables. While the theories of valuation are not overly
complicated, the accuracy of the valuation result is only as good as the vari-
ables that go into it. The valuation of closely held businesses is often compli-
cated because of the limitations of the underlying information and the way
private businesses are operated. Unlike public companies, private businesses
often do not have complete and accurate information available. Dollar for dol-
lar, the time to accurately value most profitable private companies is out of
proportion to the analysis of public-company securities. This is illustrated in
the following case study that demonstrates the financial theor ies of business
valuation and the level of information needed for an accurate result.
For the past 20 years, Bob has owned and operated a manufacturing business
that has grown significantly since its inception. Bob is approaching 60 years of
age and his children do not appear capable of taking over the company. He is
contemplating the future of the business at a time when he would like to slow
down. One of his options is selling his business. Bob’s company, ACME Manu-
facturing Inc. is a manufacturer of certain types of adhesives and sealants and
has revenues of approximately $50 million. It has six manufacturing locations
throughout the country. Bob owns 100% of the company’s common stock. He
does not know what the company is worth, nor does he know how its value