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Alcohol and The Origins of Business Valuation

A seemingly salacious title to a blog post, but the Business Valuation industry originated from alcohol – or lack thereof.In 1920 with the enactment of prohibition many enterprises that were engaged in the alcoholic beverage business were allowed tax breaks by the U.S. Government for “damages” suffered.  In order to determine certain tax benefits to these businesses their “intangible value” or “goodwill” had to be determined.  Prior to this time it was commonly believed that the value in a business was essentially the value of its assets less its liabilities.But, as we know today, business value comes in many forms – although most notably in the cash and profits it generates, has generated, and will generate.  But goodwill is also imputed into a brand name, some special technology that may or may not have materialized into a market, and in a myriad of other ways.  Even a stable staff generates goodwill.As a direct result of prohibition the IRS published a document called the Appeals and Revenue Memorandum (or ARM) 34.  ARM 34 presented two novel ideas: 1) Goodwill exists if a business has earnings in excess of another “like business” and 2) Goodwill value is determined by calculating the “current value” of those excess earnings. These concepts formed the basis for the practice of business valuation today.  Additional questions, responses, and new sophisticated methods dealing with business valuation resulted.  Check us out over at Fair Market Valuations to find out more.Posted by: John Klearman, Fair Market Valuations

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