As a CPA who performs business valuations, it is not uncommon when explaining business valuations to people in other fields to be told, Valuation is for you finance guys.Its not my cup of tea.

        Many people restrain themselves from understanding basic concepts of valuation. Todays world is technology driven. The Internet has ensured that the world is truly a small place in which to live. It has provided us with multiple options including running online businesses and becoming successful entrepreneurs. Now, what if we start a business tomorrow (online or otherwise) and become successful? We develop a unique concept with such high demand that a company like Microsoft, Yahoo, or Google offers to pay us cash and buy our business. Wow! Thats a big and an aspiring thought. How do we decide how much the buyer should pay us? All of us want to make money, but how would we know if we are being paid our companys worth or not? Thus, understanding simple and basic concepts of valuation would help us better answer these questions.

        Lets start with the concept of going concern. Every business is assumed to be a going concern. What does this mean? It simply means that a business goes on to a perpetual timeframe in the future and not just a short determinable immediate future. One may ask why this is important. It is not just important but imperative that we understand the concept of going concern to ensure we dont end up selling our business for a value much less than the return that it may have provided if we had not sold it. Where does this take us? It takes us to a concept in valuation called Useful Economic Life. Estimating the useful economic life of an asset/business is an important aspect of valuation. The first step in understanding useful economic life of an asset involves understanding the average expected life for a new asset in the same category. Experience has revealed that the average life of an intangible asset will invariably be less than its legal life or its economic life or both.

        The legal life of an intangible asset indicates the maximum or the ceiling limit on the expected life of the asset.
The economic life of an intangible asset may be understood as the life term over which the asset generates an income or alternatively a savings in cost (indirect revenue). Of course, both internal and external factors play a vital role in determining the economic life of an intangible asset. While most profitable businesses are assumed to be running for a perpetual lifetime, the economic lifetime of the asset (under the income model) is defined as the period over which the cash flow of the business/asset is discounted. Though this sounds simple, quantifying the useful economic life of an asset is not an easy job. This is because valuation of an asset or a business is governed, influenced, and impacted by external factors. These include, but are not limited to

1) The usefulness of the asset,

2) Life of the asset,

3) Legal issues including license to use the asset, pricing, etc.,

4) Obsolescence of technology associated with the asset,

5) Demand in the market for the asset or the product that the business sells,

6) Competing technologies that are substitutes for the asset, and

6) The recurrence and cost of maintenance on the asset over its lifetime.

Even with an understanding of the above concepts, valuation specialists have to better understand the asset

class or category by itself to ensure justice to the valuation.  This, coupled with the ability of the valuator to extrapolate

historical and projected cash flow of the asset, is extremely important.  Though there are multiple sophisticated

analytical techniques available to estimate the value of an intangible asset, identifying the appropriate methodology for

the valuation is a job by itself.  

Ultimately, the use of a valuation specialist will help to estimate a fair value of a great idea.

For more information on Tauber & Balser, P.C.s business valuation services contact:

Richard Millman, CPA/ABV, CVA
404.814.4905
rmillman@tbcpa.com

Patrick Braley, CPA
404.814.4964
pbraley@tbcpa.com