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| 1 |
I'm confused. What is
the difference between a business valuation,
business evaluation and business appraisal?
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| 2 |
Is
there one single best method to valuing
a professional practice or association?
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| 3 |
What
is a closely held corporation?
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| 4 |
What
factors should be considered when valuing
a closely held corporation?
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| 5 |
Which
methods to valuing a closely held corporation
would be considered most appropriate?
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| 6 |
What
is liquidation value and when is it
pushed upon the court?
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| 7 |
What
is book value and when is it thrust
upon the court?
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| 8 |
What
is a separately owned close corporation?
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| 9 |
Normally,
what position do courts take on valuing
appreciation in a separately owned close
corporation?
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| 10 |
How
can the value of goodwill be determined?
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| 11 |
How
much does a business appraisal or business
valuation cost?
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| 12 |
What
is the difference between Investment
Value and Fair Market Value?
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| 13 |
What
is a minority discount?
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| 14 |
What
Is a marketability discount?
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| 15 |
When
is the best time to have my business
appraised?
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| 16 |
In
practical non-financial terms, what
is the "real world" value
of my business?
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| 17 |
As
a business owner, what are the benefits
I receive by having my business appraised?
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| 18 |
What
kinds of records will be required for
my valuation?
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| 19 |
If
I'm thinking about exiting the business
what are my options?
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| 20 |
Are
earnings multiples a good approach to
setting a value on my business?
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| 21 |
Why
should I have my business appraised
if I'm planning to turn it over to my
son or daughter?
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| 22 |
If
I'm only going to sell a minority portion
of my business do I need a valuation?
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| 23 |
Why
can't I just use industry "rules
of thumb" to value my business?
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| 24 |
How
is the value of my business determined?
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| 25 |
What
methods does a valuator use?
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| 26 |
How
much time is required in preparing a
proper business valuation?
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1 For
the most part, the terms business valuation
and business appraisal are synonymous.
Over the past ten years or so, business
valuation has become the more accepted
term, which connotes placing a reasonable
market value on a present going business
or the value of a planned start-up business.
A business evaluation is more involved
with the management consulting genre.
It has to do with assessing the entire
business organization and its relative
operating effectiveness.
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2 No.
Various approaches to value should be
considered and correlated to determine
value.
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3 It
is a corporation whose shares are owned
by a very few stockholders. In a large
number of closely held corporations
one family holds all shares.
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| 4 |
- The general nature of the
business and a thorough understanding
of the history of the business.
- The overall outlook of the
economy and in particular
the specific outlook of the
industry in which the corporation
competes.
- The financial condition
of the business and its book
value.
- The earning and dividend
paying ability of the company.
- Does goodwill exist?
- Historic sales of the stock
and the size of the block
of stock to be valued.
- The market price of stocks
of companies that are traded
publicly and in a similar
line of business.
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5 Those
methods that address book value, liquidation
value, and income capitalization methods.
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6 This
approach assumes that all debts will
be paid after the assets of the business
are sold. Solo practitioners typically
take the position that, without them,
there businesses have no value except
for its tangible assets. Most courts
do not agree with this position and
include goodwill in the value.
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7 This
approach subtracts liabilities from
the company’s assets at their
depreciated value. This method ignores
goodwill, however some courts accept
it.
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8 This
exists when one spouse owns an interest
in a closely held corporation prior
to marriage.
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9 Some
states hold the appreciation that is
passive, for example inflation, is not
marital property, although, increases
in value from contributions of money
or time, by one or both spouses is marital
property.
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10 There
are a number of methods for valuing
goodwill. At least one or more will
be pertinent depending upon the facts
and circumstances of each case. Expert
witnesses often disagree about the
proper method to be used. A few of
these methods are as follows:
- Income capitalization methods:
- Simple Capitalization - The
net profit of the business is
capitalized to determine the
total value of the business.
The value of all the tangible
assets is subtracted from the
total value to establish the
value of the intangible assets,
or goodwill.
- Excess Earnings - the amount
of earnings that are in excess
of those normally earned by
a similar business are capitalized
to determine the value of goodwill.
- Income Tax Method - The past
five years net income is averaged
and a reasonable expected rate
of return for tangible assets
and salary requirements are
subtracted. The resulting value
is then capitalized to arrive
at the goodwill value.
- Market Value - The price a
willing seller would accept
and a willing buyer would pay
for goodwill.
- Buy /Sell Agreement - The
value of goodwill is established
by a formula in the buy/ sell
agreement.
- Rule of Thumb - Goodwill is
worth one years gross income
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11 A.
The price of a business valuation report
depends entirely on the amount of time
and expense it requires to conduct interviews,
inspect the premises, review and analyze
financial information, review and analyze
the markets in which the company participates,
sort out the real value drivers in the
subject business, find comparative data
such as sales of similar companies,
review and analyze various different
approaches to value to determine their
relevance to the subject company, reconcile
all of the data and various approaches
to value, create and write a narrative
report, review the report for accuracy,
and present the report to the client.
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12
- Investment
Value is the value to a particular
buyer or investor considering
his or her specific personal
circumstances and knowledge
of the transaction and potential
synergies it will create.
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Fair Market Value is “the
price at which the property
would change hands between
a willing buyer and a willing
seller when the former is
not under any compulsion to
buy and the latter is not
under any compulsion to sell,
both parties have reasonable
knowledge of relevant facts.
Fair market value is used
for federal and state tax
matters, including gift, estate,
income and inheritance taxes.
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13 A
minority discount is a downward adjustment
in the value of shares in a corporation,
reflecting the risks associated with
a minority position. (i.e. Consider
a company for which a willing buyer
would pay $1 million if buying every
share of stock. Would the same buyer
pay $300,000 for only 30-percent ownership?
Probably not, because the 30-percent
buyer does not get the benefits of managerial
control but does assume the risks, including
cash-out mergers, of a minority position.
Thus, some argue that the open market
forces a discount on minority shareholders
and, therefore, the appraisal remedy
ought to, as well.)
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14 “An
amount or percentage deducted from an
ownership interest to reflect the relative
absence of marketability.” Is
widely recognized by courts, valuation
experts, and the IRS and the “cost”
of the lack of liquidity inherent in
the stock of companies for which there
is no ready market for the shares.
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15 Today
we live in a world often characterized
by gigabytes and hyperlinks. If your
newly formed business has been in continuous
and successful operation for two years
or more, it’s a good idea to have
it valued. Why? Our clients tell us
again and again about calls they have
received from larger parent firms who
are on an acquisition fast track and
are interested in "them".
And when it comes to negotiating the
mechanics of the deal, if you don't
have a solid number "in your pocket"
produced by an independent valuation
firm, you could be leaving tens, or
even hundreds of thousands of dollars
on the table. Remember the axiom...
"Its always easy to lower the price,
but ever so hard to raise it".
Another "best time" to have
your business valued is when it is 20
years old or older and you're thinking
of exiting the business because of retirement
or burnout.
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16 In
the context of turning the business
over to new or different owners, "real
world" value amounts to a reasonable
price for the business that will reward
the present owner fairly for his/her
development of a profit producing entity
with continuing cash flow potential.
The price must also, however, treat
the purchaser fairly in that the final
price paid is one which can be justified
by the income stream of the business
in a reasonable period of time and provide
an attractive return on investment.
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17 To
begin with, when you know what your
business is worth you have a more realistic
perspective from which to plan the future
direction of the business, i.e. let's
say your business was worth $750,000
... would your thinking about it's future
change if it was worth $2,000,000? Also,
do you plan on working until the "final
day"? Is the business to be turned
over to your children or to your employees?
Or will you sell to a competitor or
an outside buyer? All these alternatives
become easier to deal with when the
business value is known. Estate and
tax planning also require a business
valuation. And finally, there is one
benefit that some owners refer to as
"breathability". Without a
valuation you guess about the value
of your business. With a valuation,
you know. And knowing your business
value allows you to "breathe"
a whole lot easier.
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18 Typically,
year end financial statements including
balance sheets and income statements
and cash flow statements if they're
available. Added to this are copious
conversations with the owner(s) and/or
the accountant who is responsible for
the firm's records and or tax returns.
If additional statements are available
which go back as far as five or six
years, they can also be included to
provide a more balanced view of the
operation and its financial history.
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19 There
are several. They would include; 1)
an outright sale of the business, 2)
turnover of the business to relatives
or employees, 3) merger with a friendly
competitor who has the knowledge, insight
and capital to drive the business forward,
4) retain absentee ownership of the
business and hire an administrative
manager to continue its operation, 5)
terminate the business and liquidate
its assets. A professional business
valuation is necessary (if not vital)
when considering options 1, 2 or 3.
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20 Probably
not. While various public companies
may be trading at multiples of 10, 20
or even higher, a closely held firm
usually doesn't have the resources to
justify higher multiples. For the typical
public company, these would include
size, the ability to raise capital;
a well structured, integrated management
team and last but not least the availability
of buyers. Determining how a firm correlates
to one in the public market is complex,
requires considerable professional analysis
and is probably not cost effective for
most firms.
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21 Because
when the "turning over" takes
place, it amounts to a gift that you
are providing to your child or children
and may also include shares they will
be purchasing. (If they are purchasing
shares... at what price?) And when the
IRS audits the gift, the burden of supporting
the value of the property "given"
is upon the taxpayer. A well-documented
appraisal of the business will help
establish the gift value and indicate
to the IRS that a valuation was performed
properly. Minority and/or lack of marketability
discounts may also become involved and
your appraisal firm should also be able
to provide this important service and
supply the necessary analysis and documentation.
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22 In
most cases yes and for good reason.
When you sell a less than controlling
position of your firm, that "portion"
is no doubt worth more now than when
you formed the company. And if you sell
another "portion" in say two
years from now, it may well be worth
more than the portion you sold this
year. In business, things and value,
change. And the best way to keep in
touch with your business value is with
a professional business valuation. It's
also a good idea to have your valuation
up-dated regularly.
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23 Industry
"rules of thumb" are simple,
extremely generalized formulas based
on an industry average of similar
companies sold in the past. They generally
determine value based on some multiple
of sales revenues or net earnings.
It is important to note that the very
term "averages" would accurately
suggest that the true value of most
companies would fall either above
or below the average values determined
- and quite often these variances
could be very substantial. Furthermore,
no two companies are alike, which
would leave such generalized "average"
comparisons of little practical worth.
Although it may provide some limited
interest to compare these rules of
thumb to a proper valuation report
on an "after-the-fact" basis,
rarely do they lead to any accurate
or meaningful conclusions. Use of
these rules of thumb are therefore
highly discouraged and sharply criticized
by qualified valuation professionals.
They may appear to be relatively simple
on the surface, but most often their
use will produce misleading results.
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24 The
true value of a business interest
is based on two types of assets -
tangible assets (real estate, furniture,
fixtures, machinery and equipment,
etc.), and intangible assets (goodwill,
name recognition, customer lists,
location, trademarks and copyrights,
workforce in place, special processes,
etc.). Quite often the value of a
company's intangible assets can be
substantially greater than its tangible
assets.
Properly valuing a business, especially
intangible assets, requires substantial
skill, experience and training on
the part of the valuation professional.
A thorough analysis of the business
must be made including historical
financial analysis to determine true
profitability, future potential and
overall financial health. An evaluation
of the company's current strengths,
weaknesses and vulnerabilities must
be made, competitive factors must
be taken into consideration, as well
as the capability of management and
the company itself, the impact of
the national and local economy, the
future economic prospects for the
industry in which the company operates,
etc. Issues related to control and
marketability found in the business
interest must be additionally evaluated.
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| 25 Valuators
select their valuation methods according
to the type of property or asset and
the purpose of the valuation. A valuator
usually chooses one primary method to
drive the asset’s value and uses
one or two others to serve as checks
or supports of that value. The three
most common methods used are: the income
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26 It
can easily take as much as 40 to 60
hours to prepare a thorough analysis
of a company, to make a proper determination
of value for the enterprise, and to
document the findings in a professional
report. The amount of time required
can be substantially influenced by
the availability of quality, accurate
financial records as well as the overall
purpose and desired use of the report.
When it’s time to buy or sell
a business, dissolve a professional
partnership or marriage, or place
a value on holdings for estate and
gift tax purposes, a guess is not
good enough. You need precise figures,
and our Certified Valuations Analysts’
experience ensures you will get just
that. Our CVAs, teamed with our accounting,
tax, and consulting specialists, provide
reliable valuations for litigation,
merger & acquisition, tax and
accounting purposes.
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