Value a Business
Common Sense in Business Valuation

Valuation Technique 6: Common Sense in Business Valuation

The divorce was headed for court, and yours truly was to be one of the key witnesses for placing a value on the couple’s business. I was not a member of either the Institute of Business Appraisers or the American Society of Appraisers, and, in fact, my entire educational credentials were suspect. I was, however, a “somewhat seasoned” business intermediary who had sold three of his own businesses. All this hoopla is not about how difficult this valuation assignment had become, but simply about how to approach a valuation when one does not have the appropriate experience as an appraiser.

The method I used in preparing my written valuation was so simple it was just a matter of common sense. My client was well known in the plumbing supply business, having served on the board of the National Plumbing Supply Association. Working in conjunction with him, I called more than twenty owners of other plumbing supply distributors. I asked them if they had bought or sold any similar businesses and to share with me their knowledge as to the basis of their valuation. Inasmuch as plumbing supply distribution is similar to most other distributorships, 85 percent of the assets were in either inventory or receivables. Furthermore, it is a personal relationship business, with both vendors and customers having virtually no long-term exclusives. Based on the above, I documented every conversation and came to the conclusion that my client’s business was worth book value plus a 10 percent goodwill premium on the condition that the inventory and receivables were fairly current. Fortunately, like so many litigation cases, the divorce matter was settled out of court the day before the trial, so I never had to defend my appraisal. Nevertheless, I was prepared to base my valuation on the accepted wisdom of my client’s peers.