5.16 Differences between share valuations and asset valuations
The difference between a share valuation engagement and an asset valuation engagement is perhaps only relevant for a business owner considering the sale of their business. In short, it will almost always cost more for the shares to be valued, simply because there is more work to be done by the CBV.
By way of background, the sale of a business will always involve some tension as sellers generally prefer to sell their companies (i.e. the shares) while buyers prefer to buy business assets.
Sellers of shares of qualified small businesses may be able to use a capital gains exemption that will lessen the tax burden of the sale. It’s also a cleaner deal for the seller (nothing is left for the seller to sell or close).
However, for the buyer, buying assets has several advantages, some tax-related (resetting tax values of capital assets to fair market value may provide a “bump” for tax allowances), some simplicity-related (the due diligence process could be shorter) and some exposure-related (in buying assets a buyer will not need to assume the risk of hidden liabilities). The circumstances should always be examined as there may be specific reasons for the way the deal is structured.
The valuation of the shares of a company involves more than just valuing its underlying assets.
The valuation of a business for an asset sale only requires the CBV to reach a conclusion as to the enterprise value (including Goodwill). This can be found by shortened versions of the capitalized cashflow or adjusted net asset methods, without any adjustment for redundant assets, term debt, or shareholder accounts. The latter three items will likely remain with the company. The buyer may be able to select specifically which assets to acquire (and which liabilities to leave with the company).
The valuation of a business for a share sale, however, requires the CBV to reach a conclusion as to the equity value. This requires the CBV to determine the enterprise value and then adjust for redundant assets, term debt and shareholder accounts, all of which (unless cleaned out) remain part of the company.
Contact MVI if you require clarification regarding what needs to be valued.