What Is Business Valuation and How Is It Calculated?

By Joey N. Friedman, CPA, ABV, MAcc, MIB — President, Joey Friedman CPA PA. This article is published by Joey Friedman CPA PA, a Florida professional association. All forensic accounting, business valuation, expert witness, and litigation support services described herein are provided by Joey Friedman CPA PA. Mr. Friedman’s professional credentials and experience are exercised in his capacity as an officer, agent, and licensed CPA practicing under and on behalf of Joey Friedman CPA PA.

Quick Answer

What is business valuation and how is it calculated by a forensic CPA
What Is Business Valuation and How Is It Calculated? 1

Business valuation is the process of determining the economic worth of a business using accepted methodology grounded in income generation, market comparables, and underlying asset value. A professional valuation answers the question “what is this business worth?” with documented inputs, established methods, and a defensible reconciliation. The three core approaches — income, market, and asset — are applied per AICPA Statement on Standards for Valuation Services (SSVS) No. 1. The choice of method depends on what’s being valued (controlling interest vs minority interest, going concern vs liquidation), what records are available, and what the matter requires (divorce, sale, estate tax, shareholder dispute). The output is a written report stating the value conclusion, the methodology applied, the data sources used, and the reasoning that supports the conclusion. A credentialed business valuation accountant — typically ABV (AICPA) or CVA (NACVA) — performs the work in a manner designed to survive challenge from sophisticated buyers, opposing counsel, or tax authorities.

Whether you’re navigating a Florida divorce, considering selling your business, planning your estate, dissolving a partnership, or facing a shareholder dispute, business valuation provides the financial foundation for the decisions ahead. This article explains what business valuation is, how it’s calculated, what records you need, and what to look for in a defensible report.

What Business Valuation Determines

A business valuation answers a specific question: what is the economic worth of this business, in this specific context, for this specific purpose, as of this specific date?

The “specific context” matters. The same business can be worth different amounts depending on:

  • Standard of value applied — fair market value (FMV) for divorce in Florida, fair value (FV) for shareholder oppression, investment value for a strategic-buyer transaction
  • Premise of value — going concern vs liquidation
  • Type of interest valued — controlling vs minority, marketable vs non-marketable
  • Effective date — value as of January 1 of one year vs the next can differ materially
  • Purpose of valuation — divorce, sale, estate tax, financing, internal management

A defensible valuation report makes each of these explicit. The report cover specifies what is being valued, for what purpose, as of what date, and under what standard.

Why Business Valuation Matters

Business valuation matters because real money is at stake — and the wrong number costs the wrong party:

Florida divorce. A spouse’s business interest is typically part of the marital estate. An undervalued business gives the other spouse less than their share. An overvalued business gives them more than they’re entitled to. The judge’s distribution flows from the value conclusion.

Estate and gift tax. The IRS taxes business transfers based on fair market value. An undervalued business saves estate or gift tax — until the IRS audits and challenges the value, potentially with penalties.

Partnership and shareholder buyouts. When one party exits, the valuation determines what they’re paid out. Both parties have incentives to dispute. A documented professional valuation reduces dispute risk.

Mergers and acquisitions. Buyers and sellers each value the target. The negotiated price typically sits between the two. A pre-negotiation valuation positions either party with sharper data.

Litigation damages. Where a business has been harmed (breach, fraud, lost profits), the value-before vs value-after spread quantifies damages.

Financial planning. Owners often plan based on what they think the business is worth. Without a professional valuation, that’s a guess — and the guess is usually wrong by a meaningful margin.

How Business Valuation Is Calculated

The high-level calculation follows three steps:

  1. Choose the standard and premise of value. Standard determines whether marketability/control discounts apply. Premise determines whether assets are valued as going-concern or liquidation.
  2. Apply valuation methods from the three approaches (income, market, asset).
  3. Reconcile across methods to reach a final value conclusion.

The three approaches:

Income approach

Values the business based on its future earnings discounted to present value. Two primary methods:

  • Discounted cash flow (DCF): project cash flows year-by-year for 5-10 years, add a terminal value, discount everything back to present value using a risk-adjusted discount rate
  • Capitalization of earnings: divide normalized stable earnings by a capitalization rate (discount rate minus long-term growth) — works for businesses with stable, predictable earnings

Market approach

Values the business based on what comparable companies sell for or trade for. Two primary methods:

  • Guideline public company: apply EV/EBITDA and other multiples from publicly-traded companies in the same industry
  • Guideline transaction: apply multiples from actual sales of similar closely-held businesses

Asset approach

Values the business based on its underlying assets and liabilities. Two primary methods:

  • Net asset value: restate balance sheet to fair market value, subtract liabilities, derive equity value
  • Liquidation value: estimate what assets would fetch in a wind-down scenario

See business valuation methods: 6 key approaches for a deeper walk-through of each method.

What Records the Valuation Requires

A thorough business valuation typically requires:

  • 5 years of financial statements (income statements, balance sheets, cash flow statements)
  • 5 years of business tax returns (Form 1120, 1120-S, or 1065)
  • General ledger detail for the most recent 2-3 years
  • Payroll records and detail on owner compensation
  • Credit card statements (to identify discretionary spending)
  • Major contracts (customer, supplier, lease)
  • Organizational documents (articles, bylaws, operating agreement)
  • Capitalization table (ownership structure)
  • Any prior valuations
  • Industry-relevant operating data (capacity, customer concentration, key relationships)
  • Real estate, equipment, intangible asset details
  • Any current or anticipated litigation

For litigation valuations, additional records may be required: depositions, expert reports from opposing experts, deal-related materials. The forensic CPA collects records through formal discovery and through informal requests; the records list grows as the analysis develops.

The Normalization Process

Before applying valuation methods, the analyst normalizes the financial statements. Normalization removes the effects of how the owner has chosen to operate the business, restating earnings to what a third-party buyer would see.

Common normalization adjustments:

  • Owner compensation — restate to market-rate salary for the role
  • Discretionary expenses — remove personal items run through the business (cars, country clubs, family travel)
  • Non-recurring items — strip out one-time gains/losses
  • Related-party transactions — restate to arm’s-length terms
  • Excess or deficient capital — adjust for non-operating cash or insufficient working capital

Normalized earnings typically differ from reported earnings by 10%–30%+. The normalization is often the most consequential — and most contested — part of a litigation valuation. See income normalization in Florida divorce for a deeper walk-through.

The Discount Application

After deriving an indicated value, the analyst applies discounts where appropriate:

Discount for lack of marketability (DLOM). A closely-held business interest can’t be sold to the public on demand. The DLOM reflects the time, cost, and uncertainty of selling. Typical range: 15%-35%.

Discount for lack of control (DLOC). A minority interest has less control over distributions, hiring, strategic decisions, and sale than a controlling interest. Typical range: 10%-30%.

The standard of value determines which discounts apply. Florida divorce (fair market value) typically applies DLOM and DLOC. Florida shareholder oppression (fair value, per statute) typically does NOT apply these discounts.

What a Valuation Report Looks Like

A defensible business valuation report includes:

  • Cover and scope: subject business, valuation date, standard of value, purpose
  • Executive summary: value conclusion and key assumptions
  • Description of the subject: business operations, industry, market position
  • Financial analysis: historical financial review, normalization, trend analysis
  • Industry and market analysis: external conditions affecting value
  • Methodology applied: each method used, including the reasoning for selection
  • Calculations: detailed support for each method’s value indication
  • Reconciliation: how the methods were weighted to reach the final conclusion
  • Discount analysis: which discounts applied and the empirical support
  • Conclusion: final value conclusion
  • Limiting conditions and assumptions
  • Appraiser qualifications
  • Sources and supporting documentation

For litigation valuations, the report follows the AICPA Statement on Standards for Forensic Services (SSCS) in addition to SSVS. The work is performed expecting it will be challenged.

Who Performs Business Valuations

Several credentials qualify a professional to perform business valuations:

  • ABV (Accredited in Business Valuation) — AICPA credential, restricted to licensed CPAs. Considered the leading credential for CPA-performed valuation work.
  • CVA (Certified Valuation Analyst) — NACVA credential, doesn’t require CPA license. Respected alternative to ABV.
  • ASA (Accredited Senior Appraiser) — American Society of Appraisers. Strong credential particularly for asset-heavy valuations.
  • CFA (Chartered Financial Analyst) — more common for investment valuation contexts.

For Florida litigation valuations (divorce, shareholder oppression, partnership dissolution), ABV-credentialed CPAs are typically the preferred choice. The underlying CPA license carries weight, and the AICPA Statement on Standards for Valuation Services governs the methodology. See business valuation accountants and CVA vs ABV vs MAFF for deeper comparison.

What Drives Business Valuation Cost

Engagement cost varies primarily by the depth of analysis required and the matter context:

  • Internal-management estimate — limited scope, narrower documentation; not suitable for litigation
  • Florida divorce valuation — requires full ABV-credentialed report with marketability and control discount analysis
  • Estate or gift tax valuation — must meet IRS scrutiny standards; depth of discount analysis matters
  • Commercial litigation valuation — Daubert-defensible methodology; depends on records availability and complexity
  • Complex multi-entity valuations — multiple businesses, related-party transactions, intercompany flows all add scope
  • Sale-side valuation for M&A — typically handled by transaction-side advisors who structure their engagements differently

For expert witness testimony engagements, additional time is required for deposition preparation, trial preparation, and trial testimony — typically billed at the same hourly rate as the analytical work. See how to get an accurate business valuation for the practical engagement workflow. Contact the firm for engagement details for your specific matter.

How Long Does Business Valuation Take?

Typical timelines:

  • Focused engagements (single business, moderate complexity): 4-8 weeks
  • Complex engagements (multiple entities, normalization-heavy): 12-20 weeks
  • Tax-driven valuations on deadline: 3-4 weeks with appropriate scope
  • Litigation valuations requiring expert report: schedule typically driven by court-ordered expert disclosure dates

The analytical work itself is rarely the time-constraint — record collection and normalization typically drive the schedule.

Common Mistakes to Avoid

The most common errors that compromise valuation outcomes:

Using non-credentialed professionals. A regular CPA without specialty credentials shouldn’t perform formal valuations. Tax authorities, courts, and sophisticated buyers may discount or reject the work. See red flags in a closely-held business valuation for what to watch for.

Skipping normalization. Valuations based on reported (unnormalized) earnings typically understate value. The normalization gap can be 20%-40%+ of value in owner-managed businesses.

Wrong standard of value. Applying fair market value when fair value is required (or vice versa) materially changes the conclusion. The standard must match the matter.

Single-method valuations. A defensible valuation applies multiple methods and reconciles. Single-method valuations are vulnerable to challenge.

Late engagement. Engaging a valuation expert mid-litigation or just before tax deadlines compresses the work and reduces analytical depth. Engaging early benefits the outcome.

Owner-prepared “valuations.” Owners often dramatically over- or under-estimate their business value. Self-prepared valuations don’t survive third-party scrutiny.

Working with a Business Valuation Professional

If you’re facing a Florida divorce involving a closely-held business, planning a partnership buyout, managing an estate with business interests, or in any other situation where business value matters, the appropriate first step is engaging a credentialed business valuation professional. The methodology selected, records collected, and analytical depth all benefit from being planned at the start.

Joey Friedman CPA PA, through its President Joey N. Friedman, CPA, ABV, MAcc, MIB, provides ABV-credentialed business valuation services throughout Florida. The firm’s valuation practice applies the methodology discussed in this article across divorce, shareholder oppression, partnership dissolution, estate and gift tax, and commercial litigation matters. Contact the firm to discuss your specific situation.

Frequently Asked Questions

What is the most common business valuation method?

The most common method for closely-held operating businesses is the income approach using capitalization of earnings, combined with a market approach using EV/EBITDA from guideline transactions or public companies. Most defensible valuations apply at least two methods and reconcile across them.

How do you value a small business?

The same three approaches apply: income, market, and asset. For small businesses, the income approach (capitalization of seller’s discretionary earnings or normalized EBITDA) and the market approach (guideline transactions of similar small businesses) typically dominate. The asset approach is less commonly the primary method for operating small businesses. Selection follows the same logic as larger valuations — the analyst applies methods that fit the facts.

Can I do my own business valuation?

For rough internal management or planning purposes, an owner can estimate value using the income approach (apply an industry multiple to EBITDA). For any formal purpose — litigation, tax, transaction, financing — the valuation should be performed by a credentialed professional. Self-prepared valuations don’t survive third-party scrutiny.

How is goodwill valued in a business?

Goodwill is typically the difference between the indicated value (from income/market approach) and the net asset value (from asset approach). It represents the operational value above the underlying tangible assets — customer relationships, brand, operational know-how, workforce continuity. For owner-driven businesses, the analyst distinguishes enterprise goodwill (attached to the business, transferable) from personal goodwill (attached to the owner, may not transfer). See professional services firm valuation: goodwill vs personal goodwill for a deeper treatment.

What’s the difference between business appraisal and business valuation?

In practice, the terms overlap. “Business appraisal” often connotes formal-purpose valuations under USPAP (Uniform Standards of Professional Appraisal Practice), while “business valuation” connotes valuations under AICPA SSVS or similar standards. The work product is similar; the underlying standards differ. Both serve the purpose of determining the economic worth of a business.

How often should a business be valued?

For internal planning purposes, every 3-5 years is reasonable for owner-operated businesses. For estate planning purposes, more frequent valuations may be appropriate as the estate plan evolves. For active deal contexts (buy-sell agreements, partnership transitions), valuations are typically updated at the event. The marginal cost of an updated valuation is typically less than the cost of a stale conclusion.

What records does a forensic CPA need for business valuation?

Typically: 5 years of financial statements, 5 years of business tax returns, general ledger detail for the most recent 2-3 years, payroll records, credit card statements, major contracts, organizational documents, capitalization table, prior valuations, industry-relevant operating data, real estate/equipment details, and any current or anticipated litigation. For litigation valuations, additional records collected through discovery.

Why do business valuations differ between experts?

Several reasons: different methodology selection, different normalization adjustments, different multiple or discount rate choices, different comparable selections, different premise of value, different standard of value. Even between thorough experts working from the same records, value conclusions can differ 10-30% on the same business. Litigation valuations frequently feature competing experts whose methodologies and inputs differ — the reconciliation of differences is part of what the trier of fact resolves. See evaluating the opposing expert’s business valuation for what to look for.

About Joey Friedman CPA PA

Joey Friedman CPA PA is a Florida professional association providing forensic accounting, business valuation, expert witness, and litigation support services. The firm is led by Joey N. Friedman, CPA, ABV, MAcc, MIB, who serves as the firm’s President.

All services described in this article are provided by Joey Friedman CPA PA. Engagement letters and professional services are issued by the firm. Joey N. Friedman signs in his capacity as the firm’s President — as an officer and agent acting on behalf of Joey Friedman CPA PA, not in any personal or individual capacity. Mr. Friedman’s professional credentials — including CPA license, ABV (Accredited in Business Valuation, AICPA), and ACFE membership — are exercised under the firm.

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Disclaimer: This article is for informational purposes only and does not constitute legal, accounting, or tax advice. Engagement of Joey Friedman CPA PA is subject to a written engagement letter executed between Joey Friedman CPA PA and the engaging party. No attorney-client or accountant-client relationship is created by reading this article.

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