Question

A business is being sold and a CPA Firm was hired to value the business and recommend a minimum possible selling price to management . This is the audited information as of Dec 31 2018 provided by the business:

Book Value of Assets = $2,000,000

Book Value of Liabilities = $800,000

Equity = $1,200,000

Sales for the last 3 years 2018: $550,000; 2017: $580,000; 2016: $600,000

Net Income for the last 3 years:2018 $55,000; 2017 $69,000; 2016 $90,000      

The CPA Firm assessed the market value of Assets to be $1,500,000. Please respond to the following:

1. Based on the above information, what do you think would be the minimum selling price of the business?
2. Let’s assume management wants to sell the business for $2,000,000; there is a difference between the CPA Firm assessment value and management selling price. What do you think would be the reason for this difference?

Answer 1

Minimum selling price for the business = Market Value of assets - Value of liabilities

= 1,500,000-800,000 = $700,000

Management wants to sell the business at a higher price of $2,000,000

The reason for Difference is the present value of net income that will be generated from the business in future years.

Past data shows the increasing trend of sales and net income. It means that higher income will be generated in future as well. Hence, value of those earnings must have been included in the present sales price.