9
OPINION
Your own worst enemy
If you don’t identify and address your firm’s problems, you could increase the measure of risk while decreasing value.
T here is a four-letter word floating around out there that’s probably the first that comes to mind when someone is determining whether an investment is worthwhile. Guessed it yet? If you haven’t, then I’ll tell you: It’s risk.
Anyone with a pile of money looking to invest does not generally do so without first assessing the riskiness of an investment, the likelihood of receiving a return on that investment, and the level of risk present to determine how much return will be required. People usually think of big, publicly traded companies when investing, and do not put as much emphasis on returns when dealing with private companies. In many cases, people investing in closely-held firms tend to look at it more from the perspective of lifestyle than a formal investment. That is, they see the “returns” more along the lines of independence, setting one’s own schedule, and discretion with money management. When it comes to valuing private company shares, the valuation exercise requires the development of rates of return and firm owners should expect not just a return of investment, but a return on investment.
A majority of private company valuations are performed under the premise of fair market value as defined in IRS Revenue Ruling 59-60. This is the ruling most commonly prescribed as a guide for the valuation of closely-held companies and their securities – the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both having reasonable knowledge of the relevant facts. Revenue Ruling 59-60 goes on to enumerate several factors for consideration, including the earning capacity of the business. Enter the income approach. The income approach to valuing a business uses a financial return stream to develop an indication
Tracey Eaves
See TRACEY EAVES , page 10
THE ZWEIG LETTER APRIL 19, 2024, SPECIAL ISSUE
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