Parties who are involved in merger or acquisition discussions, or who anticipate being involved in an M&A transaction, often rely on Cross Northwest for objective and independent advice regarding the structuring and pricing of the transaction.
In almost every M&A transaction involving a closely held business or fractional interest, one of the first, most important and difficult questions to settle is, “How much is it worth?” Buyers want to know investment value for potential targets. Because valuation can have such a significant effect on the acquiring company’s financial returns and shareholder value, management should bring in a third-party valuation expert as early as possible during the acquisition process. Sellers likewise want to know what price their business would likely command in the market place.
All participants need objective analysis, experience and conclusions they can trust. Because of our M&A advisory work, Cross Northwest’ appraisers have exceptional knowledge of the real-world behavior of transaction participants. Our independent valuations are considered exceptionally credible by buyers, sellers, boards of directors, trustees and management when considering and making important transactions.
Cross Northwest provides valuations for a range of transactions, including sales, mergers, acquisitions, divestitures, management buy-outs, employee stock ownership plans (ESOP’s), leveraged buy-outs, capital raising, bank financing, recapitalizations, going private, liquidations and bankruptcy. A client may need a fairness opinion (a third-party confirmation of value) to complete a transaction that has already been negotiated. We evaluate transactions from a strategic or financial buyer viewpoint, based on client objectives and the specific circumstances of the transaction. Mergers often require that two or more companies be valued.
As M&A advisors, our transaction services often go well beyond valuation. We also work with clients through the entire M&A process to ensure successful business sales, and provide services for acquisitions and other business transactions.
Companies and shareholders come to us for independent business appraisals when a shareholder retires, is fired, quits, passes away, becomes incapacitated, withdraws, or some other trigger event occurs. We also provide valuations when buy-sell agreements are being created or updated, and periodically during the life of the business as shares are bought and sold, for buy-sell funding, and for business and exit planning.
A buy-sell agreement should provide a) a means to liquidate interests at a fair and reasonable value upon certain trigger events, b) a funding plan that is affordable for the company and realizable by the selling shareholder, c) restrictions on who can own shares, and d) certainty for tax and other planning purposes.
The valuation provision in a buy-sell agreement is a critical aspect. Most buy-sell agreements stipulate that the share price be based on an independent valuation of the business. Without agreement on how shares will be valued, shareholders often find themselves negotiating price with former friends, their families or estates, after the interests of the parties have diverged. Such negotiations are difficult, fraught with conflict and uncertainty, and often lead to litigation.
Cross Northwest provides business valuation services and fair market value business appraisals of closely-held corporations, Family Limited Partnerships (FLPs), partnerships and limited liability companies for gifting, estate tax, charitable donations, C to S Corporation conversions and other tax purposes. We value fractional interests in operating companies, asset holding companies and family limited partnerships using appropriate discounts.
The IRS requires that a qualified business appraisal be performed by a qualified appraiser. Cross Northwest’ appraisers more than meet the IRS requirements, and we are prepared to defend our work in the unlikely event of an audit. Our certified appraisal reports address the factors listed in Revenue Ruling 59-60 and comply with USPAP and IRS valuation guidelines. An independent valuation by a qualified appraiser is your best defense against an IRS challenge!
A certified business appraisal is required to determine the value of a decedent’s interest in a closely held business. Generally, the estate tax return is due nine months after the date of death. Business owners who wish to gift ownership in their businesses must determine value as of the date of gift. Gift tax returns are generally due on April 15th following the year in which a gift is made.
When closely held business interests are donated to a Charitable Remainder Trust, a business valuation supports the charitable deduction by the donor taxpayer. Overvaluation penalties can be substantial if the amount claimed for tax deduction exceeds the fair market value of the interest transferred.
Accurate asset valuations are essential to estate planning and wealth preservation. For estates involving private businesses, a valuation is often the starting point for estate planning professionals as they consider various estate planning techniques that might benefit the business owner.
A valuation should be obtained when an existing C corporation elects to be taxed as (converts to) a subchapter S corporation. The valuation establishes a tax basis for the corporate assets at the time of the election. The tax basis is important because a sale of corporate assets within 10 years after conversion may be subject to built-in gains tax. Built-in gain is the amount by which the fair market value of an asset exceeds its adjusted tax basis as of the conversion date.
By law, an ESOP cannot pay a price in excess of “adequate consideration” for any shares that it acquires, as determined by an independent appraisal of the fair market value of the sponsor company’s shares. An independent valuation must also be obtained at least annually, or whenever the ESOP purchases or sells stock.
Cross Northwest appraises businesses and intangible assets to help settle disputes between owners of closely held companies, and between owners and tax authorities.
Shareholder disputes may include buy-sell disagreements, oppressed shareholder suits, dissenter’s rights cases, involuntary dissolution proceedings, and marital dissolution (equitable distribution). Cross Northwest will objectively apply valuation theory and methods within statutory guidelines, operating in the emotionally charged and often difficult atmosphere of owner disputes. Often we are brought in well before any legal action is taken. In legal proceedings, we can participate from initial case evaluation, through mediation, binding arbitration and trial.
In a dispute setting, our role is to serve as either A) an independent valuation expert providing oral testimony or written reports, or B) a consulting valuation advisor to an attorney and his/her client.
As an independent appraisal expert we advocate for our findings only and thus bring credibility and impartiality to disputes. We encourage parties to seek peaceful resolutions through mediation. We are often jointly retained by all parties in a dispute, to reach a settlement without going to arbitration or trial. In some cases, we are court appointed. Our formal reports and testimony are understandable by a judge or jury. We can also review and critique other appraiser’s reports, and consult with trial counsel in deposing participants or cross-examining valuation experts.
Disputes with tax authorities can result from differences in opinion of the value of a business interest. Differences arise because valuation is not an exact science and is based in part on the application of informed judgment and common sense to the facts and circumstances of a business. Our appraisers are exceptional at analyzing facts and applying accepted valuation methods to arrive at a defensible opinion of value supported by a report that conforms to professional standards. We are prepared to defend our business valuations services work in the unlikely event of an audit or challenge.
Whether you intend to transfer your business to family, management or a third party, a proactive exit plan is important to a successful outcome. Business Succession and Exit Planning often begins with having a qualified independent expert provide a baseline valuation of the company.
Determining the value of a business is a key aspect of an SBA lender’s underwriting process for loan applications involving a business acquisition (change of ownership). Cross Northwest is a qualified source for business valuations for SBA loans.
According to SBA Standard Operating Procedure 50-10-5(c), paragraph (i), page 179, for all business acquisition loans over $350,000, or whenever a buyer and seller have a close relationship, the lender must obtain an independent business valuation from a qualified source. Examples of “close relationships” include transactions between: Employer-Employee; Family members; Co-Owners; and any parties that have an existing, non-arms-length relationship. A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by a recognized organization.