In brief, when making important decisions involving value. Assuming an incorrect value can lead to a failed sale or acquisition, buy-out, tax filing, or dispute resolution. See business valuation uses.
Nothing. Financial professionals use these terms interchangeably. They are both opinions of value. Be sure to understand the scope of analysis and level of report that the analyst will provide, regardless of what they call it.
Yes. The word “value” by itself is not specific enough when it comes to business valuation. Different standards of value are used, depending on the purpose and use of the business valuation, and even sometimes the applicable legal jurisdiction. The following standards of value are commonly used to establish the economic value of privately held business interests:
Book Value is not a standard of value. It is an accounting concept. Due to the nature of the accounting process, book value would equal economic value only by chance!
Before an appraiser can value a business, the appropriate standard of value must be ascertained. In a dispute setting, for example, an incorrect standard of value would cause the valuation result to be dismissed altogether.
Yes, it is our policy to never divulge anything about our engagements unless we’re officially directed otherwise. We can be retained by your attorney to provide client-attorney privilege.
Absolutely, with no vested interests and no hidden agendas.
Yes. Common intangible assets are customer and supplier contracts, license agreements, franchises, covenants-not-to-compete, copyrights, designs, goodwill, technology, software, trade names, intellectual property, trademarks, patents, copyrights, trade secrets and proprietary methods or technology. Intangibles assets are non-physical assets (as distinguished from physical assets) that grant rights and privileges, and have economic benefits for the owner.
Yes. If the IRS audits a gift, the burden of supporting the value of the gift is on the taxpayer. A qualified business appraisal demonstrates to the IRS that shares are properly valued. See your CPA for advice.
A family limited partnership (FLP) is a business entity established to hold business or financial assets of a family. FLPs provide a number of advantages including centralized management, protection from creditors, and the ability to apply valuation discounts to the partnership interests for estate and gift tax purposes.
Yes. We will ask to review your buy-sell or shareholder agreement, if you have one. A buy-sell agreement controls how ownership interests in a company are transferred. It is important that private companies with multiple owners have written buy-sell agreements! If you don’t have one, we can still value your interest, but the appropriate standard of value will need to be agreed upon.
We usually value either an invested capital or equity interest in a business. Generally speaking, equity means net worth, or assets minus liabilities. The value of invested capital (sometimes called enterprise value or asset value), is the debt free value of an enterprise. A simple example of invested capital value is when a real estate appraiser values a residential property at, say, $500,000. The appraiser is not concerned with how much is owed on the property, thus the $500,000 is equivalent to invested capital. If we subtract the mortgage owed on the home (interest-bearing debt in the case of a business), let’s say $275,000 in this example, its equity value is $225,000.
An approach is a general way of determining value for a business, business ownership interest, security or intangible asset; using one or more business valuation methods.
The Asset Approach, also called the cost approach, is based on the value of a company’s underlying assets and liabilities, and is generally an indication of the value that has accumulated over time. Generally speaking the cost of duplicating or replacing each component is determined, sometimes using specialist appraisers (e.g. real estate, machinery and equipment). Common asset-based methods are a) Adjusted Book Value Method (sometimes augmented by the Excess Earnings Method to value intangibles), b) Replacement Cost Method, and c) Liquidation Value Method. Liquidation value is the amount that could be obtained from a piecemeal sale of business assets, after expenses, when carried out in either an orderly or forced manner.
The Market Approach is based on the principle of substitution, meaning that for any investment an investor considers, there exist other investments with similar characteristics that are acceptable substitutes. Prudent investors will not pay more for something than they can pay for an equally desirable substitute. Since the objective of an appraisal assignment is usually to arrive at an opinion of market value, it is logical to examine values determined and tested in the marketplace. Two common methods within the market approach are: a) Guideline Public Company Method; and b) Direct Market Data Method.
The Income Approach considers the earnings capacity of a company. It operates on the theory that investors invest in businesses with similar investment characteristics, though not necessarily of the same business type. It values a business based on the present worth of the expected future benefit stream, adjusted for risk. Because estimating the future financial performance of a business is speculative, historical data is considered (though not entirely relied upon), on the premise that history often repeats itself. Two common methods within this approach are the Single Period Capitalization Method and Multi-Period Discount Method (discounted future cash flows method).
Similar to the preceding discussion concerning standard of value, selecting a premise of value has a substantial effect. There are two basic premises: a) value as a going concern and b) value in liquidation. A premise is normally chosen based on the highest and best use of the business, given the circumstances and market conditions on the date of business valuation. A going concern premise usually assumes that a company will continue in business in a similar manner as conducted in the past, and is based on a company’s ability to generate earnings. According to USPAP, Standards Rule 9-3, in developing an appraisal of an equity interest in a business enterprise with the ability to cause liquidation, an appraiser must investigate the possibility that the business enterprise may have a higher value by liquidation of all or part of the enterprise than by continued operation as is.
A minority interest in a company may be considered less valuable than a non-controlling interest because the minority interest holder can’t control policy setting, payment of dividends, compensation, investment in and disposition of assets, strategic direction and operational aspects of the company. Investors generally pay more for the rights, liberties and benefits afforded a controlling interest, versus a non-controlling interest. A Discount for Lack of Control (DLOC) is a percentage deducted from the pro rata value of a one hundred percent (100%) equity interest in a business to reflect the absence of some or all of the powers of control.
Valuing stock in a private company requires assessing the degree of marketability (liquidity) of the shares in question. Unlike public company securities that have an organized marketplace and are convertible to cash within a few days, most closely held stock is more difficult to sell. A lack of liquidity increases an investor’s required rate of return because it either increases the holding period of the investment (and therefore exposure to changing market conditions) or the cost to convert it to cash or both. Research supports the view that lack of liquidity of privately held securities has a significant impact on value. An ownership interest is not simply marketable or non-marketable (liquid or illiquid). There are degrees of marketability and the appropriate Discount for Lack of Marketability (DLOM) will depend on the facts and circumstances affecting the specific interest being valued and requires careful study.
No. However we can direct you to qualified real estate appraisers or contract out real estate appraisals when a business that we’re appraising owns real estate or leases it from a related party.
We do appraise holding companies (often family limited partnerships) that hold real estate assets. We also value fractional equity interests in those entities using appropriate discounts, but we do not value fractional undivided interests in real estate directly. Call us for more information.
Maybe. We have the utmost respect for the accounting profession and most CPA’s do an excellent job with taxes and accounting; however very few (<2%) have the expertise and credentials to value businesses. Most CPA’s won’t appraise their own clients’ businesses even if qualified to do so because they have an inherent conflict of interest. More often, CPA’s ask us to appraise their clients’ businesses, and supply us with the quality financial reporting we need to do the valuation.
No! We are not CPA’s and we do not prepare tax returns. Our focus is on the expert valuation and transfer of private business interests.
No. Some people wrongly perceive business valuation services as a commodity that yields identical results regardless of the valuation provider. However, training and experience matter a great deal, as does the scope of analysis and depth of research conducted, among other factors, and all business valuation outcomes are not identical.
Value is an opinion not a fact. Whether or not a business valuation withstands the scrutiny of a partner, investor, regulator, lender or judge, as the case may be, depends on the credibility and skill of the individual offering the opinion. Selecting a certified professional increases the likelihood that a valuation will be accepted by your intended users. Before you hire a business appraiser, understand his or her credentials and experience.
Major business valuation credentials in the U.S. are (alphabetically):
The cost of a given business valuation depends on the hours and expenses involved. Factors include 1) the intended use and users, 2) the scope of analysis and report necessary, 3) the nature and complexity of the business and make up of its assets, 4) the specific business interest being valued, and 5) access to and the quality of information available. It can take many hours to analyze a company appropriately, develop a financial forecast, apply the correct valuation methods, make a final determination of value and prepare a sufficiently detailed report. When appropriate, we can provide limited value calculations for less than the cost of a full business appraisal. The appropriate level of service can be determined during our initial phone call or meeting. Exit Strategies’ fees are fair and competitive. Our initial consultation is free.
When you only need an estimate of value for internal use, a calculation analysis and letter report may be adequate. For IRS purposes and shareholder disputes, a full analysis and summary or full report is needed. When a third party investor will rely on the report, a summary report is usually appropriate. We can make a recommendation after our initial conversation. Our initial consultation is free.
Full scope business valuations generally take 3-4 weeks from our receipt of the information we need from you. Actual time-frame depends on the scope of work, the complexity of the business, the accuracy and completeness of information, workload and other factors. We can often deliver reports on accelerated time frames when required.