Value Drivers in Business Valuation

What Are Value Drivers?

The classic answer to what drives the financial value of an investment is SGLPTL.  This acronym stands for:
Size, Growth, Leverage, Performance, Turnover, and Liquidity.


It is easy to observe in the market that larger companies demand and receive higher prices for their stock than do smaller ones and that doesn’t matter much how you measure size. Bigger is better!


The greater the expected growth and the longer period of time it can be sustained, the greater the value attached to that investment. In times of irrational exuberance as in the year 2000, companies that could demonstrate the ability to grow rapidly often reflected rising prices for their stock even though they also had rising losses.


Businesses that have the ability to raise capital in the debt market are more highly prized than those that must depend solely upon equity investors. It is the ability to borrow not the presence of debt that increases the perception of value.


There are many different measures of financial performance. Those companies that can consistently produce the highest returns for the least amount of risk enjoy relatively higher market prices for their stock than those that are either inconsistent or just not getting the job done.


Similar to performance, turnover measures how efficiently the company employs its various assets. Using less to make more is perceived as good, allowing the investor to expand and diversify.


The company that has lots of cash will be preferred over the one that has much of its assets tied up in long term investments with little ability to adapt to change.

DLOM & DLOC: How they Affect BusinesS value

Levels of value and the associated discounts and premiums can be complex issues that are often difficult to understand for most individuals not formally trained in business valuation.

The differences between minority and control values and marketable versus nonmarketable values are often subtle.

Merrimack Business Appraisers keeps abreast of the latest peer-reviewed methods regarding when a Discount for Lack of Marketability (DLOM) or a Discount [or Premium] for Lack of Control (DLOC) should be applied, and fully explains the appropriate degree of adjustment when required in providing its business valuation services.


Divorce – State by State Standards of Value and Treatment of Personal Goodwill

Divorce proceedings trigger the need for a business valuation when a business is involved. It is very important to define the standard of value and to separate personal goodwill from enterprise goodwill as part of the valuation process.

Standard of Value

The standard of value defines the value to whom and under what assumptions.  This includes both real and hypothetical circumstances.  All value is a function of the present worth of the future benefits the ownership interest is expected to generate for the holder of that interest.

In divorce cases, the standard of value determines whether the business interest is valued as if it is to be sold (Fair Market Value) or valued as if it is held by a specific individual (Fair Value to the Holder or Investment Value).


In many states, personal goodwill is not considered a marital asset. In some states, no goodwill, including enterprise and personal goodwill are considered marital assets.

The following table shows generally where each state stands regarding a standard of value and whether personal goodwill is considered a marital asset. However, these are generalizations, and each state has its own particular nuances. 

Table of Standard of Value and Personal Goodwill in Divorce by State

Note the below are subject to change and as noted, there are nuances to discuss based on the state and the situation. Please contact us to discuss.

StateStandard of Value in DivorceIs Personal Goodwill a Marital Asset?*
AlabamaFair ValueUndecided
AlaskaFair Market ValueNo
ArizonaInvestment ValueYes
ArkansasFair Market ValueNo
CaliforniaInvestment ValueIt’s complicated.
ColoradoInvestment ValueYes
ConnecticutFair Market ValueNo
DelawareFair Market ValueNo
District of ColumbiaFair Market ValueNo
FloridaFair Market ValueNo
GeorgiaFair Market ValueNo
HawaiiFair Market ValueNo
IdahoFair Market ValueIt’s complicated.
IllinoisFair Market ValueNo
IndianaFair Market ValueIt’s complicated.
IowaFair Market ValueIt’s complicated.
KansasFair Market ValueFocus on ‘marketability’ or ‘salability’
KentuckyFair Market ValueNo
LouisianaFair Market ValueNo
MaineFair Market ValueNo
MarylandFair Market ValueNo
MassachusettsFair ValueNo
MichiganInvestment/Fair Market ValueYes
MinnesotaFair Market ValueNo
MississippiFair Market ValueNo (includes all goodwill)
MissouriFair Market ValueNo
MontanaInvestment/Fair Market ValueYes
NebraskaFair Market ValueYes
NevadaInvestment ValueYes
New HampshireFair Market ValueNo
New JerseyFair/Investment ValueYes
New MexicoInvestment ValueYes
New YorkInvestment/Fair Market ValueYes
North CarolinaFair Market ValueYes
North DakotaFair Market ValueYes
OhioFair Market ValueYes
OklahomaFair Market ValueNo
OregonFair Market ValueNo
PennsylvaniaFair Market ValueNo
Rhode IslandFair Market ValueNo
South CarolinaFair Market ValueNo
South DakotaFair Market ValueIt’s complicated.
TennesseeFair Market ValueIt’s complicated.
TexasFair Market ValueNo
UtahFair Market ValueNo
VermontFair Market ValueNo
VirginiaFair ValueNo
WashingtonInvestment ValueYes
West VirginiaFair Market ValueNo
WisconsinFair Market ValueFocus on ‘marketability’ or ‘salability’
WyomingFair Market ValueNo
*Source: as of April 2019.

Personal Goodwill vs. Enterprise Goodwill

The Ability to Separate Personal Goodwill from the Overall Goodwill of the Company May Have Significant Financial Benefits to the Owner

The concept of personal goodwill versus enterprise goodwill is important to business owners in two contexts:

  • Income tax at time of sale
  • Divorce

In the Case Of a Sale of a C Corporation, for Example:
Proceeds received from the sale that can be allocated to the personal goodwill of the seller may be taxed at much more favorable rates. In the case of divorce, depending on the state, personal goodwill may not be considered a marital asset.  Learn more here.

How Goodwill Is Defined

The International Glossary of Business Valuation Terms defines goodwill as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.” This goodwill can attach to the enterprise or to the working owner depending on the facts and circumstances regarding the relationships with the customers and other outside stakeholders.

The concept of personal goodwill has been well documented and discussed in professional business appraisal texts and periodicals. The concept has also been reviewed and accepted in both tax and family courts. The methodologies applied have developed and been “cross-pollinated” in both contexts.

The leading published educators in business valuation define personal goodwill as follows:

Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS.

“Logic states that if something cannot be sold, it cannot have value. However, a license provides the professional with the ability to make a living, and therefore, it has intrinsic value to the individual licensee. … Professional practices generally provide specialized services, which require the owners, and frequently their employees, to possess special levels of knowledge. Because of this, the value of the practice is highly dependent on the skills, reputation, and efforts of individual professionals. Therefore, some of the value of the practice is attributable to the personal reputation or skill of the owner and may not be transferable to a buyer. For example, a skilled heart surgeon cannot transfer his or her skilled hands to a willing buyer. This is known as professional goodwill. … The existence of professional goodwill is based on the fact that clients come to the individual, as opposed to the firm. This may be based on the individual’s skills, knowledge, reputation, personality, and other factors. The implied assumption is that if this individual moved to another firm, the clients would go with him or her.”

[Trugman, Gary, Understanding Business Valuation, 5th ed., New York: AICPA, 2017]

Dr. Shannon P. Pratt, DBA, CFA, FASA, MCBA

“In general, goodwill is defined as the ability to earn a rate of return in excess of a normal rate of return on the net assets of the business. In marital dissolution cases, this goodwill may require allocation between two types of good will: (1) institutional (or practice) goodwill and (2) professional (or personal) goodwill. Professional or personal goodwill may be described as the intangible value attributable solely to the efforts of or reputation of an owner spouse of the subject business. Institutional [enterprise] or practice goodwill may be described as the intangible value that would continue to inure to the small business of professional practice without the presence of that specific owner spouse.”

[Pratt, Shannon, Robert F. Reilly and Robert P. Schweihs, Valuing Small Businesses and Professional Practices, 3rd ed., New York: McGraw-Hill, 1998]

Separating Enterprise and Personal Goodwill

Various methods for separating enterprise and personal goodwill have been discussed in the leading business valuation texts and periodicals.

David N. Wood published An Allocation Model for Distinguishing Enterprise Goodwill from Personal Goodwill in the Fall 2004 edition of the American Journal of Family Law. He also published a follow-up article, Goodwill Attributes: Assessing Utility in the January/February 2007 edition of The Value Examiner. Both articles discuss application of multivariate utility theory in allocating goodwill to the enterprise and the professional and have been peer reviewed, tested in family and tax courts for many years and remain accepted practices.

The multivariate utility theory includes a process of assigning goodwill to various attributes or factors of the Business that create goodwill, attributing and weighting those attributes to the enterprise or the professional based on the appraiser’s informed judgment, and calculating an indication of the allocation of goodwill between the enterprise and the professional.

Business Factors that Create Goodwill

While no single method has been selected as the best, the factors that should be considered include:

  • Age and health of the owner
  • Demonstrated earning power
  • Reputation in the community for judgment, skill, and knowledge
  • Comparative success
  • Nature and duration of the business
  • Marketability of the business
  • Types of clients and services
  • Location and demographics
  • How the fees are billed
  • Source of new customers
  • Individual practitioner’s amount of production
  • Workforce and length of service
  • Competitors in the community competing in the same service or specialty

A Practical Approach to Allocating Goodwill

Each of these factors is analyzed in the context of belonging to the person or the enterprise, and the results used to allocate total goodwill between the two. While the method is somewhat subjective, it does present a practical approach to allocating goodwill that has been peer reviewed.

Accuracy is insured through the business appraiser’s informed judgment in determining the nature of the value associated with each factor.


IRS Regulations

What the IRS Says About Business Appraisals

The IRS Tax Requirement

For certain tax filing purposes, the IRS requires that an appraisal be completed by a “Qualified Appraiser” as defined in IRS Regulations.

The Definition of a “Qualified Appraiser”

The regulations state a “Qualified Appraiser” is one who has earned an appraisal designation from a professional appraisal organization, has the appropriate education and experience and performs appraisals on a regular basis.

Pertinent IRS Bulletins

The IRS has the concept of a “Qualified Appraiser” defined in their regulations: Internal Revenue Bulletin 2006-46 and Notice 2006-96 regarding Section 170(f)(11) of the Internal Revenue Code, relating to the new definitions of “qualified appraisal” and “qualified appraiser.”

The Term “Qualified Appraisal”

Section 170(f)(11)(E)(i) provides that the term “qualified appraisal” means an appraisal that is (1) treated as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the Secretary.

The Term “Qualified Appraiser”

Section 170(f)(11)(E)(ii) provides that the term “qualified appraiser” means an individual who (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, (2) regularly performs appraisals for which the individual receives compensation, and (3) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.

Property Qualification

Section 170(f)(11)(E)(iii) further provides that an individual will not be treated as a qualified appraiser unless that individual (1) demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and (2) has not been prohibited from practicing before the Internal Revenue Service by the Secretary under S 330(c) of Title 31 of the United States Code at any time during the 3-year period ending on the date of the appraisal.


IRS Compliance
Merrimack Business Appraisers produces accurate business valuations that meet and exceed IRS requirements and acceptance, including the requirements for a “Qualified Appraisal” and “Qualified Appraiser” as stated in IRS regulations.


Your client’s confidentiality is assured. We abide by the highest standards including the confidentiality that a business appraisal is being done.

Value Added

This is a value added service that accountants can offer their clients while avoiding any potential conflicts of interest. We offer business valuation services that are an objective, impartial company valuation and are solely focused on business valuations.



Merrimack Business Appraisers prepares business valuations that stand up to rigorous scrutiny including the toughest cross-examination.


The opinion of value is unambiguous, and fully explained, supported, and well-documented.

Minority Discounts
Merrimack Business Appraisers fully understands, applies, and explains the concepts of minority discounts and personal goodwill.

Standard of Value

Merrimack Business Appraisers works with the attorney to determine the appropriate Standard of Value for the given situation and forum.


Collaborative Dispute Resolution and Business Valuation

An Alternative to Traditional Litigation

Collaborative Law and collaborative dispute resolution focus on communicating, negotiating, and collaborating to achieve an agreed settlement. This approach offers each party the benefit of avoiding costly, lengthy, and often stressful court proceedings to resolve family law matters. In the case of a divorce where a business interest is involved, a business valuation may be desired to provide an objective opinion of value of the business.

Attorneys involved in the collaborative law process for a divorce often seek advice from neutral advisors, including certified business appraisers. Parties may agree to use a single business valuation company for business valuation, agreeing to abide by the opinion of value prepared and saving on costs with one valuation prepared.

Merrimack Business Appraisers has developed many business valuations for divorce settlement via Collaborative Law and settlement counsel work. As an objective, neutral party, our success is determined by the number of times the issue of business value has been resolved based on our company valuation reports without court proceedings.

Get Started.


Business Valuation for Gift and Estate Tax

The Current Market Situation Creates an Opportunity for Business Owners to Gift Shares with Reduced Overall Tax Consequences

Many business owners who were considering gifting shares to family and employees are now moving ahead with those plans.  In gifting ownership shares, three regulations are important to the taxpayer and the advisor:

  • The 2006 Pension Protection Act defines the concepts of “Qualified Appraiser” and “Qualified Appraisal.”
  • The 1998 IRS Restructuring and Reform Act shifted the burden of proof from the tax payer to the IRS if the tax payer cooperated with the IRS, complied with the law, and provided “credible evidence” (the new standard from adequate disclosure).
  • The 1997 Tax Relief Act established a three-year statute of limitations that starts with the filing of a return if it includes “adequate disclosure.”
What Do These Three Regulations Mean for Taxpayers and Their Advisors?

If the taxpayer files a Qualified Appraisal prepared by a Qualified Appraiser, then the burden of proof may be shifted from the taxpayer to the IRS, and the three-year statute of limitations clock is started.  It also makes the taxpayer’s case much less desirable for the IRS to pursue.  This greatly reduces the risk of audit and potential liability for the taxpayer and their advisors.

2006 Business Valuation Guidelines

On July 27, 2006, the IRS issued business valuation standards (IRM 4.48.4 Engineering Program, Business Valuation Guidelines). While the guidelines do not specifically state that compliance with Uniform Standards of Professional Appraisal Practice (USPAP) is required, the IRS requirements are very similar to the requirements listed in USPAP. Compliance with USPAP is not stated because the IRS does not control USPAP.  However, the IRS has implied that a USPAP compliant appraisal will be considered a “Qualified Appraisal.”

2006 Pension Protection Act
Defines the concepts of “Qualified Appraiser” and “Qualified Appraisal.”

  • Focused on charitable gifts only.
  • Gives the IRS the authority to limit charitable contributions other than cash greater than $5,000 to their Fair Market Value as determined by a “Qualified Appraisal” prepared by a “Qualified Appraiser.”
  • This standard is expected to be extended to valuations for all IRS filings.
Qualified Appraiser:
  • Has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary [includes CBA (Certified Business Appraiser), ASA, ABV, and CVA].
  • Regularly performs appraisals for which the individual receives compensation, and
  • Meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.
  • For returns filed after February 16, 2007:
    • Successfully completed college or professional-level coursework that is relevant to the property being valued.
    • Obtained at least two years of experience in the trade or business of buying, selling, or valuing the type of property being valued, and
    • Fully described in the appraisal the appraiser’s education and experience that qualify the appraiser to value the type of property being valued.
Qualified Appraisal:
  • Section 170(f)(11)(E)(i) provides that the term “qualified appraisal” means an appraisal that is (1) treated as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the Secretary.
  • Qualified Appraisal – an appraisal will be treated as a qualified appraisal within the meaning of § 170(f)(11)(E) if the appraisal complies with all of the requirements of § 1.170A-13(c) of the existing regulations (except to the extent the regulations are inconsistent with § 170(f)(11), and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards.
  • Generally accepted appraisal standards – an appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards within the meaning of § 170(f)(11)(E)(i)(II) if, for example, the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (“USPAP”), as developed by the Appraisal Standards Board of the Appraisal Foundation.

Provisions For Penalties
The Act includes provisions for penalties: the penalties include a fine of the lesser of 10% of the underpayment, $1000, or 125% of the appraisal fee; and being put on a blacklist of people who cannot submit work to the IRS. The qualified appraisal must contain the following language:

The appraiser understands that a substantial or gross valuation misstatement resulting from an appraisal of the value of property that the appraiser knows, or reasonably should have known, would be used in connection with a return or claim for refund, may subject the appraiser to a civil penalty under §6695A.

The IRS includes appraisers in the definition of both signing and non-signing preparers, with discretion to impose the section 6694 and 6695A penalties against an appraiser depending on the facts and circumstances.

1998 IRS Restructuring and Reform Act
Purpose is to simplify tax collection and administration, and protect the public from overzealous IRS agents.

It shifted the burden of proof from the taxpayer to the IRS in U.S. Tax Court, the federal district courts, and the Court of Federal Claims. Before 1998, the process was that the taxpayer file, IRS send Notice of Deficiency, taxpayer must pay tax & fine, then taxpayer can file for a rebate, IRS can negotiate a settlement.

The burden of proof is now shifted to the IRS if the taxpayer (IRC §7491):

  1. Cooperated with the IRS audit.
  2. Complied with the law, and
  3. Provided “Credible Evidence.” This is a new standard from “adequate disclosure,” but the elements were not defined.

Failure to meet the three requirements means the burden of proof reverts to the taxpayer:

  • The IRS can file a delinquency
  • Tax payer has to pay the tax, and then claim a rebate (guilty until proven innocent)
  • Prove that the IRS is wrong, and
  • The taxpayer has to pay for his own defense prosecution in court.

The IRS Has To Prove The Taxpayer Was Wrong
However, if the taxpayer does the three things, then the burden of proof is shifted to the IRS – the IRS has to prove that the taxpayer was wrong before collecting the tax.

Credible evidence is the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of the IRS correctness). Griffin v. Commissioner.

Providing Credible Evidence

A taxpayer has not produced credible evidence for these purposes if the taxpayer merely makes implausible factual assertions, frivolous claims, or tax protestor-type arguments. The introduction of evidence will not meet this standard if the court is not convinced that it is worthy of belief. If, after evidence from both sides, the court believes that the evidence is equally balanced, the court shall find that the Secretary has not sustained his burden of proof.

Credible Evidence means the IRS must prove in court that the actual additional tax due is at least 50% of the difference between the taxpayer filing and the IRS claim. If the IRS does not prove 50% of the difference as awarded by the court, the IRS has to pay the taxpayers’ legal costs for the defense (the taxpayer still has to pay the tax differential, but the IRS pays the legal fees (§ 7430)).

Taxpayer Relief Act of 1997 (TRA)
Established a statute of limitations on IRS actions for gift taxes (IRC §6501):

  • Previously, the IRS could go after the taxpayer at any time (not reported; 6 years if underreported 25%).
  • 1997 TRA, established a 3-year clock (statute of limitation) that starts with the filing of a return if it includes “adequate disclosure.” To start the clock, the taxpayer must provide “adequate disclosure.” However, adequate disclosure was not defined in the statute – how minimal the disclosure can be and still qualify as “adequate” was unknown.
  • Once the 3 years lapse, a taxpayer can usually use it as protection from an IRS assessment of the gift tax liability.

In 1997, an Appraiser was defined as anyone who claims to do appraisals. An Appraisal was defined as a detailed description with financial information. This applied to transfers other than just gift tax.


Understanding Business Appraiser’s Accreditations

What a Business Appraiser’s Accreditations Mean and What They Can Tell You About the Appraiser

1. Is the Business Appraiser a Full-Time Professional?

The following certifications indicate that the accredited business appraiser is a full-time experienced professional dedicated to the highest professional standards:

The CBA – Certified Business Appraiser – has the most demanding peer review and offers the most thorough, rigorous course work and training to be a business appraiser. Awarded by the Institute of Business Appraisers, its peer review process is the most demanding in the industry with more than 75% of initial reports being returned for correction before being accepted.

“the CBA is extremely difficult to obtain – this is well known in the industry. As a specific example, in 2014 we had 47 candidates submit reports, of which two were passed. … CBAs (MCBAs) represent a premier group of BV professionals who had to cross the “Grand Canyon” to achieve their designation.  This is not something to be wasted, and like a rare coin, is something to be cherished.” 

Parnell Black, CEO of the NACVA

The ASA – Accredited Senior Appraiser – the profession’s preeminent standard.
It is awarded by the American Society of Appraisers only to those who have:

  • completed over 10,000 hours of appraisal work
  • only designation required to comply with USPAP.
  • successfully passed more than 6 hours of written examinations
  • have a college education
  • and have had samples of their work product reviewed and accepted by a peer review committee.

2. Do They Have Relevant Knowledge and Experience?

The below certifications related to business valuation services indicate a greater breadth of relevant knowledge and experience in understanding buyers and sellers.

A business appraiser who has the CBA and ASA designations plus the CBI brings the highest level of understanding to any appraisal situation.
A business appraiser (CBA/ASA) who also holds a CBI (Certified Business Intermediary) designation is closely involved with actual transactions and has inside knowledge and experience regarding how buyers and sellers actually respond in different situations.

The CBI – Certified Business Intermediary – Designation
The International Business Brokers Association awards an accreditation as a Certified Business Intermediary (CBI) to individuals:

  • with 2 or more years of brokerage experience
  • that have completed a series of 64 hours of specified training classes
  • and have passed a 3 hour comprehensive written exam of which approximately 50% is based on issues about how to price businesses for sale.

“Been There, Doing That” Experience Rules
Individuals who are regularly engaged in the transfer of business ownership in the open market are thought to be some of the most knowledgeable people when it comes to what business interests sell for and defining the terms and conditions that buyers and sellers agree to in order to accomplish a sale.

3. Additional Less Rigorous Accreditations

There are other accreditation in business appraisal which you may find listed as part of a business appraiser’s credentials. They do not have the same weight as the above top accreditations. They are offered to professionals who have taken a prescribed set of courses and passed a written examination.

  • The Accredited in Business Valuation (ABV) credential is awarded by the AICPA.
  • The National Association of Certified Valuation analyst awards a credential of Certified Valuation Analyst (CVA) to professionals who have taken a 40 hour class including an examination and completed a take home case study.
  • Note: Neither of these credentials require peer review of work product.