A valuation may be used to buy a company, sell a company, mergers and acquisitions of two existing companies, to sell shares of the company to key employees, for divorce estate settlements, to settle estate and tax issues, for insurance issues or to stay current, organized and congruent with the rapid growth of your business. Regardless of the reason, everyone should know the value of their business.
Know Your Value: Different Valuations for Different Companies
Two businesses both netting $250,000 can have considerably different market values due to such comparative considerations as revenue growth rate, equipment condition, customer concentration, intellectual property, barriers to entry, competitive situation, owner’s role, administration systems, labor and capital intensity, etc. One business may be operating below capacity and the other might require significant capital investment in order to grow. One may have an absentee owner with strong operating management while the other could be highly owner dependent. There can be myriad business valuation variances for companies that on the surface are quite alike. Attempting to value a business based strictly on market comparables results in an average business valuation that is insensitive to distinguishing characteristics and hidden aspects of the business.
The business valuation of intangible assets relies on income-based methods. Accurate discernment of earnings and seller’s discretionary cash flow (SDCF) is essential if the value is to be true. The business valuation process begins with a detailed examination of the company’s revenue and expenses to accurately determine the true earnings performance of the business. Is the brother-in-law earning $50,000 really needed? Is a Porsche Cabriolet necessary for delivery purposes? If the seller owns the building, is the rent at market rate? How much business is being conducted in the addition to the owner’s house that the company’s maintenance crew built? What about stockholder compensation mystique in S versus C corporations? Inventory pricing creativity? Such typifies the discovery challenge of the appraiser and the rationale for a formal business valuation if a business is to be fully valued.
Valuations as a Share Holder
Stockholder Actions represent many different situations. For example, a minority shareholder in a company may bring action against the majority shareholder. The board of directors may have voted to buy his or her interest in the company at a price that he or she does not feel represents the true value of the shares. In a situation such as this, the minority shareholder may hire us to value the interest of that one person, conducting an independent appraisal for his or her interest in the action.
Another common time for litigation is divorce. In many instances the husband may own the business and the wife, under common law, will be entitled to half the value of that business. In this situation we would be engaged, either by the estate or by an attorney representing one of the parties, to tell the court what the business is worth.
Estate/ Tax Valuation or Gifting a Business to Related Party
Business estate valuations may be requested for a number of different matters related to estate planning. The owner of the estate may want to know the value of his or her assets and business today, as well as what they may be worth in the future. Other uses for estate valuations include planning for a Will or when looking towards retirement.
When Selling a Business: Avoid Surprises in Due Diligence
Another major reason for a business valuation is to avoid surprises in the due diligence process, which can quickly kill a deal. Full financial disclosure upfront to a buyer is extremely important. Bad news is fully disclosed might have an impact on price but at least the deal is far more likely to survive with upfront disclosure.
With precise earnings information in hand, the appraiser employs several business valuation methodologies and weights the various results according to their pertinence to the business in question. For a business with significant tangible assets, the appraiser incorporates those asset values with the intangibles through methods such as Capitalization of Excess Earnings to arrive at a fully integrated value.
Finally, the appraiser subjects the business valuation to an extensive set of qualification criteria from over 100 SBA lenders for further validation of the value. If the value withstands the SBA’s requirements standards, there is an added basis for its validity.
Every business has a range of fair market value – the business valuation process is not totally scientific. The challenge of the business valuation process is to determine a business’s true earnings, to assign fair value to its intangible assets and to uncover the hidden value drivers of the business that reside below the radar of superficial business valuation techniques.
For Legal Purposes: Legal Aspects of Business Valuation
Whether you are a seasoned practitioner or just starting, the rules of engagement relative to business valuation are constantly evolving. The courts are setting more and more precedents, the experts are getting better and there are more online valuation sources that “seem” to make economic sense. The Uniform Standards of Professional Appraisal Practice as promulgated by the Appraisal Institute of Washington, DC are changing dramatically and the experts need to stay current. It seems everyone has suddenly become an expert in the field. Consider a few things before you chose a professional business appraiser:
Picking the Right Legal Experts
We’re sure we don’t have to remind you that the people on your team are a direct reflection of you. The New England legal scene is provincial and it seems everyone knows everyone. Cases get settled to the satisfaction of the parties when credible valuation work is performed.
At George and Company we possess the expertise, qualifications, credentials and knowledge of the legal system to custom tailor reports to your needs. Our staff of qualified appraisers is large enough to get the work done quickly and done right. Our central location in Worcester, MA makes us convenient to all New England states, but we have done plenty of appraisal work outside the area as well.
Business Appraisal for Divorce Purposes
In Massachusetts, the rules for performing a professional business appraisal during divorce proceedings have changed. If you need an expert to provide business valuation and/or expert testimony for dissolution of marriage, the 2007 landmark Mass. SJC case of Bernier v. Bernier may have far reaching implications. This interesting case sets forth the court’s opinions regarding many factors that may not be used in a business valuation or appraisal that’s intended use is other than divorce. While this dissertation is intended to touch upon the main issues of Bernier, caution must be applied, as it may not be applicable in all cases.
George & Company consists of veterans who have provided hundreds of divorce appraisals. Many times, counsel for both sides will stipulate to our expert opinion to save time and money. That said, counsel still has a fiduciary responsibility to advocate the interests of their own client. Our George & Company valuation experts of Massachusetts pay careful attention to their professional ethics, not the interests of either party. After over 30 years of providing certified business appraisals and valuations to Massachusetts and New Hampshire courts, it is interesting to note that we have represented husbands and wives on a nearly equal basis. No one law firm accounts for more than 2% of our annual income. We are known to advocate our opinion of value, not the opinion of the client or their attorneys. In short, we will never be a “hired gun.”
Other benefits from hiring George & Company:
There are many different issues related to Buy/Sell Agreements. Most of the time, when we’re engaged to do that kind of an appraisal, it would have something to do with cross purchase agreement or an insurance funding agreement within the corporation.
In other situations, if one of the partners or shareholders were to die we would be charged with establishing the value of their part of the company. This is also done to make sure a business has enough insurance. Often referred as Keyman Insurance, it makes sure that if that person wasn’t able to complete his or her duties in full or if he or she were to pass away, the corporation would be paid by the insurance company based on the set value. The insurance company will require a professional or a certified appraisal in order to write this type of insurance policy.
A Buy/Sell Agreement can also be as simple as calling us up and saying “I found what I feel is a great business that I’d like to buy and I’d like to have you help me establish a value for it.” In this situation, we will represent the interest of the buyer by preparing an evaluation, in addition to generating an Offer to Purchase and/or a Buy/Sell Agreement.