Eminent Domain Report

If you've ever watched the show Shark Tank on ABC, you know that many individuals value their businesses much higher than their business' numbers suggest.  It's human nature:  you focus on the upside and tend to ignore the blemishes or risk areas.  As Kevin O'Leary -- "Mr. Wonderful" -- would say, the numbers tell the story, because it's all about the money. 

Mr. Wonderful's it's-all-about-the-numbers concept also holds true in the valuation of businesses in the eminent domain context:  the jury's task is supposed to be a sober inquiry into values, ignoring personal worth or attachment.  It's a tough issue, especially for smaller businesses where an individual runs the day-to-day operations of the business and makes a nice living doing so.  The owner-operator feels the business has substantial value, as it provides a good, steady income for the owner.  The difficulty of this situation from the valuation standpoint, however, is that one must assume the owner is not running the business, but is instead paying someone else to do so.  Thus, once someone else is paid for running the day-to-day operations, the business may not make much else and therefore has little goodwill value.  I've had this discussion with business owner clients before, and it's not easy to explain this concept.

Nevertheless, we still find wide spreads when it comes to valuing a business in eminent domain.  Unlike real estate, business valuations seem to be more art than science and small numbers can be easily manipulated to make huge differences in value.  If you're interested in learning more about business valuation concepts, I'd suggest taking a look at the blog Just Elementary run by Pramod Patel.  There's some pretty cool concepts on business valuation techniques and some of the issues one may run into when buying or selling a business.  In particular, take a look at the post Business Valuation Too High Using Wrong Methodologies and Books & Records and Your Lease Two Factors That Impact The Attractiveness Of Your Business To Potential Buyers.