CHAPTER 3
Private Business Valuation: Introduction
Private business valuation has only recently been viewed as a unique body of knowledge. In 1981, Dr. Shannon Pratt published Valuing a Business: The Analysis and Appraisal of Closely Held Companies (McGraw-Hill), the first major effort to legitimize private business appraisal as a stand-alone discipline. Before this work, private appraisal was driven by unsubstantiated opinion, and often the appraiser with the loudest opinion carried the day. During the 1990s, private valuation became sophisticated to the point where it is now a career path for thousands of business appraisers.
Professional business appraisers spend most of their time deriving fair market values of private business interests. This is understandable since fair market value is the most developed standard of value in the literature, the tax code, and the courts. Fair market value is often the default standard and is routinely employed for deriving value in a variety of scenarios, such as the value of a company to be sold or the value of a business interest in an insurable setting. It surprises many business owners and others outside of the appraisal community that a notional, hypothetical standard such as fair market value is so widely used to value actual interests. Rather than proposing a further stretch of fair market value into a one-size-fits-all standard, this book shows that the universe of private business appraisal is diverse and can be structured in a useful ...
