Value a Business
Valuation Techniques

Valuation Techniques

In valuing the target company, a very basic initial query to the owner is the question: What is for sale? The owner will generally prefer to sell stock, since such a transaction results in a single capital gains tax. A stock sale, on the other hand, may be a disadvantage to a buyer if there are depreciable assets on the balance sheet because he or she cannot “step up” the value of the assets and increase depreciation charges. In addition, the buyer will assume all liabilities resulting from previous infractions or product malfunctions. For these reasons, buyers may well value a company lower when they are required to purchase stock. Conversely, in an asset sale the seller will be taxed twice: once at the corporate level and again when distributing the proceeds of the sale out of the corporation. For the right to buy assets, therefore, the buyer may have to place a higher valuation on the target company.

Whether you buy assets or stock is only part of the answer as to what is for sale. Other considerations could include what assets, particularly real estate assets, are going to be withdrawn prior to the purchase. And, are there any obligations of the seller, particularly debt, to be assumed by the buyer?