Your Business Valuation Expert in Houston
We provide fair market valuation services in Houston TX. We are fully compliant with the Internal Revenue Service’s Revenue Ruling 59-60.
In practice, this means that we go to great lengths to determine the true value of the business in question. We do not take shortcuts or use simplistic formulas.
Our local presence in Houston allows us to provide you with a personalized service, and we can easily make site visits when needed. Our local knowledge of the Houston business community is also an asset.
Guided By the IRS Revenue Ruling 59-60
Surprisingly, many business valuators follow purely theoretical frameworks and rely heavily on pre-determined formulas in their valuations.
We believe that any serious business valuation must get to the heart of the business. Only by understanding what goes on inside the company can a credible market value be determined.
This is exactly what IRS Revenue Ruling 59-60 says, and we fully agree.
Here are some key elements of the ruling:
- The ruling explicitly discourages the use of rigid, pre-determined formulas for valuation
- Standardized cap rate tables are oversimplifications, and there are wide variations even among companies in the same industry
- Pay close attention to the nature of the business, its risks, and the stability or irregularity of its earnings
The IRS Revenue Ruling 59-60 clearly states that:
”No standard tables of capitalization rates applicable to closely held corporations can be formulated.”
“Valuations cannot be made on the basis of a prescribed formula.”
“No general formula may be given that is applicable to the many different valuation situations arising in the valuation”
“Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance.”
“Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation.”
We are surprised at the number of business valuation firms that claim to be certified but do not follow the basic principles of this IRS ruling.
At Nielsen Valuation Group, we make sure to always comply with it. In practice, this means that we fully investigate the business in question to determine its credible value in an open market.
The Importance of Beginning with Normalization
Any valuation must begin with a thorough normalization of the financial statements. This is essential because if you have the wrong inputs, the entire valuation will be based on the wrong assumptions.
Normalizing means not taking the balance sheet and income statement at face value. Here is why:
- The balance sheet shows the book value of assets and liabilities. The market pays much more attention to the market value of assets. Liabilities may also need to be adjusted depending on the situation.
- Income statements can be misleading and are easy to manipulate. For example, they may include income or expenses that are one-time or related to the private living expenses of the owner(s). Anything that should not affect the value of the business should be adjusted.
There are many more examples. For this reason, we begin each business valuation by spending considerable time preparing the inputs. Once the data is clean, we can move forward and perform a fair market valuation of the business.
How We Look at Valuation Approaches
Every business valuation must use one or more valuation approaches. This does not mean relying on formulas. The choice of methods depends on the type of business we are valuing and the purpose of the appraisal.
The main approaches are
- Asset approach: Defines value as the market value of assets after deducting liabilities.
- Market approach: Is based on the sales price of similar businesses in Houston.
- Income approach: Uses earnings and/or cash flow as the basis for valuation.
Nielsen Valuation Group uses the income approach in conjunction with the asset approach in most of our valuations. If sufficient data is available, we may also use the market approach.
In some cases, a discount rate must be applied due to lack of marketability. Where this is the case, we draw conclusions from real transactions rather than theoretical studies.
Tailored Business Valuation in Houston
Every business valuation we provide is completely tailored to the client’s needs. If you order a standardized valuation that does not take into account the specifics of your business, it is unlikely to show the fair market value of your business.
Therefore, we begin with a free 30-minute consultation in which you describe the business and the purpose of the valuation. After that, we can provide you with a customized quote. We believe that you should not pay for services that you do not need.
“Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors.“ IRS RR 59-60
What is the Value of My Houston Business?
Is it time to sell your business? We can help you with a well-balanced Houston business valuation that shows fair market value. This is a good indication of what a likely market price will be. By using fair market value as a starting point instead of inflated numbers from theoretical formulas, you increase your chances of finding a willing buyer.
We would like to point out two common misconceptions among sellers:
- Potential and price: Sellers often want the valuation to reflect future potential. However, a buyer will almost never pay for potential. They rightly see any potential as their upside in the investment and compensation for the risk they are taking. If you expect to be paid for potential, you can only expect to be paid in potential, such as shares of another high-risk investment.
- Long-term risks: Business owners, especially startup owners, often underestimate the impact of long-term risk on the value of the business. For example, it is common to hear startups point to successful cases like Tesla, Uber, Meta or Stripe to show what valuation their company should have. However, investors know that about 9 out of 10 startups fail in the long run, a risk they need to weigh when investing.
When you use Nilsen Valuation Group for your business valuation in Houston, you will get a no-nonsense calculation of the company’s true value, so you can be well-prepared to meet with potential buyers or investors.
The origin of survivor bias: During World War II, there were studies done on planes that had returned from their missions. Analysts looked at the damage and tried to figure out which parts needed to be reinforced. They came to the erroneous conclusion that the cockpit and engines did not need extra armor because they had not been hit. The truth was that those hit in those areas never came back. Today, many startups make the same mistake when analyzing their risk and long-term value.
Would You Like to Value a Houston Business?
Nielsen Valuation Group delivers unbiased, IRS RR 59-60 compliant Houston business valuations, reflecting real-world transactions. Contact us today for a free 30-minute meeting.
Want to go with a cheaper option or even do the valuation yourself?
Nothing is stopping you, but...
You may lose the lawsuit, due to the valuation failing to be waterproof.
You may never settle the conflict, hurting the relationship with your counterpart.
