Business Value & Third-Party Valuations: The Smart Business Approach
Whether or not you are planning to sell your business, you need to know its value. A third party valuation is the best means of obtaining that assessment. It will identify the key value drivers for your business so that you or the new owners can manage the firm more effectively. A professional valuation can also be useful in securing financing, estate planning, maintaining buy-sell agreements, etc. Its greatest benefit, however, is realized during the sale of the business.
Most small business owners use their tax returns and the underlying financial statements as the basis for the financial presentation of their businesses. Rarely will this reflect the true market value of a business. P & L’s are almost invariably prepared to minimize taxes rather than reflect business “goodwill”. This intangible value usually represents the largest component of what a business is actually worth. Accounting tools such as “Book Value” and depreciation are designed for tax administration, not business valuation.
Business owners often turn to their accountant or attorney for an opinion of value. By definition, these advisors are not full-time business appraisers nor do they have an arms-length relationship. As such, their advice is more often than not, some rule of thumb. In the final analysis however, there is no rule of thumb. According to the IRS, ”No formula can be devised that will be generally applicable to the multitude of different valuation issues…” (IRS Revenue Ruling 59-60).
We guide the business owner through the valuation process. We provide direction on what information should be collected and how it is to be presented. The assets and cash flow of the business are recast from a tax rendition to reflect a true economic reality. Depending on the circumstances, our professionals may simply recast historical performance or we may help prepare detailed analyses and financial models.
The third-party valuation firms we use are accredited in business valuation. They have access to databases with pricing data on both for-sale and sold businesses. We work with you to provide the valuation firm with the “recast” financial data needed to maximize the fair market value of your business without overstating it. Our recasting identifies the discretionary expenses that are economic benefits of ownership. If these expenses are argued in this light to the CPA who prepared the tax return, he might feel obligated to recommend that the owner file an amended tax return. We do not have that conflict of interest.
The completed valuation provides buyers and bankers with an independent judgment that the asking price truly reflects market value. The owner and his broker’s idea of a fair price, whether right or wrong, are tainted by their financial interest in the transaction. A third-party valuation provides credibility, reduces haggling, helps secure financing for the buyer and brings the parties to the closing table. When it’s all said and done, the owner has the security of knowing that he received a fair price for his business.
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a business valuation for your company
