Business Valuation

A CERTIFIED VALUATION ANALYST IN A TRANSFER OR SALE OF YOUR BUSINESS

If you want to leave your company successfully, one of the first things you will want to know is its value in the marketplace. In other words how much can you sell it for?  Without an idea of how much money can be generated from a sale, how will you know if you can meet your financial goals for retirement?  Your advisors aren’t going to be able to help you reach your planned destination without that information. That’s why you should hire a Certified Valuation Analyst.

Knowing how much your business can be sold for is important no matter how you intend to exit. You can exit in one of three ways:

  1. Sell in the open market to a third party
  2. Transfer to a member of your family
  3. An inside transfer to an employee or current  co-owner

Sale to an open market third party

For a sale to a third party to be successful, you need an accurate determination if, after you have sold your business and paid all required taxes, you have sufficient money to meet your lifetime financial goals. A business valuation performed in advance will give you the information to determine if you even want to begin the time consuming and very expensive process of selling your business.

Once you’ve decided to sell, you want a business valuation that has a basis in reality. You don’t want industry rules of thumb, or what a friend might have sold their company for. You don’t want to become a victim of the many sources of misinformation. The money spent on the front-end for a business valuation that leads to proper exit planning will be recouped many times over at the time of sale.

Each business is unique. Each has its’ own risks as well as its’ own intrinsic value, so hiring a certified business valuation analyst to perform a formal business valuation will give you an unbiased, accurate idea of your business’s fair market value.

If the amount of money that can be generated from a likely sale is not sufficient to give you the financial independence you are looking for, a certified valuation analyst can help point out areas for business improvement. This will help close the gap between the market value and the amount you need to retire, as well as prepare you for a future sale.

Transfer to a member of your family

If you plan to transfer any part of your company to a family member, the IRS will scrutinize the valuation method you use, looking to see if the gift is undervalued. That is why it is very important to retain a certified valuation analyst to substantiate the value, anticipating an IRS visit.

An inside transfer to an employee or current co-owner

An insider who is buying into a business with very likely want to know the company’s unbiased “true value” before they buy in. Otherwise, they will not likely be interested.

Based on that value, your exit planning advisors can create a plan that gets the owner “full value” in the most tax efficient way possible. Most likely the family member does not have the means to pay cash for the business, so cash flow from the business is needed to pay the owner.

To facilitate these transactions, minority or marketability discounts are used so the largest possible after-tax cash flow can remain in the owners’ hands. These discounts need to be substantiated by a certified valuation analyst.

In all but the simplest of scenarios, a successful exit plan requires a certified Business Valuation that all parties can rely on to be the “fair market value” of the business.

HOW IS VALUE DETERMINED?

If you want to know the value of a public company you can find what its shares trade for on the stock exchange and multiply by the total shares outstanding. For a non-public company it’s a lot more complex. There is no established market for private company shares.

When you look to buy a company what factors do you consider important?

You would start with its’ performance historically.

Then you’d look to see what its likely cash flow will be in the future.

You would want to compare this opportunity with other like investments, making sure you were comparing “apples to apples”.

A business’s value is not just limited to its “hard” tangible assets (i.e. buildings, furniture, inventory, and accounts receivable).  Intangible assets must be considered as well (i.e. employee agreements, patents, and licenses).

Risk is another important consideration. How risky is the business and the industry?

These are some of the things we use to determine value. As Certified Valuation Analysts and members of the National Association of Certified Valuators and Analysts we can be quite helpful.