The accuracy of valuation methods in predicting the selling price of small firms.

There are many reasons why it is important to estimate the selling price of a small business, yet the literature reports no studies that attempt to verify the accuracy of any valuation technique in terms of its ability to accurately predict how much the sale

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There are a number of situations in which it is necessary to determine the likely selling price of a small business. For example, the buyers of small businesses need a reliable method for determining whether the asking price for a firm is reasonable, as well as an objective basis for establishing an offer price for the business. Similarly, sellers of small businesses need a rational basis for establishing the asking price for their business and an objective basis for considering offers made by potential buyers.

Owners and investors need to know the market value of small businesses to determine the ownership percentage that is appropriate for an equity investment. Also, bankers and lenders are interested in the market value of small firms to help assess the risk involved in extending credit to a small business.

Owners may also be interested in the market value of their small business when considering whether to "harvest" their value in the firm or for estate planning purposes. In addition, market value can provide an important performance measure for management and for employee benefit planning purposes.

It is also necessary to know the market value of a firm for the purchase of key-person insurance and for the development of buy/sell agreements involving a small business. In addition, market value, especially in common law states, is usually an important issue when settling matrimonial or property disputes involving a small business owner.

In today's litigious society, the market value of a small business might be important for reaching an equitable settlement of damage cases. Also, the formation of an Employee Stock Ownership Plan for a small business requires the establishment of the market value of the firm on an annual basis.

These and other reasons indicate a need to identify reliable techniques for calculating the market value of a small business. For the purposes of this article, market value is considered to be the actual selling price of a small business.