You approach your attorney, CPA, insurance professional and other financial advisors as you’re in the beginning stages of wanting to sell your company, Tax E, Vader’s No Wax Flooring, Inc. Your advisor(s) recommended a business valuator to get an idea of what the business is worth (perhaps Abo Cipolla Financial Forensics, LLC). Abo delivers the report. Now what?
The value appears to be in the ballpark, but what do the report’s details mean? Whatever the reason for a valuation, a basic understanding of the report’s content means there’s no need to take it at face value.
Four Points of Interest
In today’s fast-paced business environment, it’s not uncommon for business owners to quickly scan a valuation report, searching for the final figure. But you can learn much more from a report if you know what to look for throughout. Here are four key areas within the document we think business owners as well as all of their advisors may wish to at least consider focusing on:
- Procedures. A business valuator will visit the site as well as perform a detailed financial analysis. Any information the valuator uses should have been available — or at least foreseeable — at the valuation’s “as of” date.
- Methodology. With various valuation approaches available, valuators choose one based on a company’s unique characteristics. The valuation report, a “conclusion of value” really should discuss all of the valuator’s options, including why some methodologies may be more appropriate than others.
- Discounts. Once the valuator applies a methodology, he or she determines whether to apply valuation discounts (or premiums) to the preliminary value. Common discounts include the minority interest and marketability. If the valuator applies discounts, he or she should detail why each was chosen, any empirical evidence available and the company’s unique characteristics.
- Conclusion. After all is said and done, the value conclusion should make economic sense, at least considering both the hypothetical buyer and the hypothetical seller.
In addition to these four areas, also look in the “conclusion of value” report for the definition of the entity being valued. This definition should include the valuation’s purpose, the company’s name, the number of shares or interest, the entity type and the “as of” date.
Readers of the report should also be on the lookout for what professional “standards” were employed.
Business valuators affiliated with a nationally recognized business valuation organization, such as a CVA (Certified Valuation Analyst) from the National Association of Certified Valuators and Analysts (NACVA); an ABV (Accredited in Business Valuation) from the American Institute of CPAs (AICPA); or an Accredited Senior Appraiser from the American Society of Appraisers (ASA) are all required to adhere to industry standards.
Standards protect users of valuation services by providing a mechanism with which to regulate us practitioners’ conduct and work quality. Practitioners affiliated with a valuation organization are subject to disciplinary action for non-compliance to standards and could lose their certification for flagrant departures. While no one currently at Abo Cipolla Financial Forensics is an ASA which we understand has very similar standards, we can tell you our ABV and CVA designations dictate we look for guidance to the standards promulgated by the AICPA and NACVA which address all aspects of members’ work product, including:
- Professional conduct
- Executing consulting and litigation engagements
- Performing a business valuation, starting with obtaining the information required to understand the business and scope of the engagement, moving through to the analysis phase which includes the methodology used and other important technical considerations
- Identifying any scope limitations
- Reporting the conclusions drawn from the analysis
The ABV and CVA were and are not that easy to obtain and require a great deal to so maintain by us and our very credible colleagues. The ABO? Well, that was a bit easier.
Each business is unique and identifying the value of a business is a complex procedure. Cost, income and market information all must be gathered and analyzed in several different approaches to accurately provide a valuation that will give the owner information needed to improve the financial condition of a business.
After a valuation of a business is complete and the results have been analyzed and studied, the owner will often be able to make adjustments to the operational efficiency of the business by simply looking at the numbers and uncovering some of the hidden strengths and weaknesses.
Other situations we’ve seen where business valuations are beneficial include:
- Litigation support, mediation and arbitration (i.e. dissenting shareholders, divorce, economic loss analysis, partner disputes, wrongful death, etc.)
- Business split-up or spin off
- Buy sell agreement
- Bankruptcy and foreclosure
- Charitable contributions or gifting programs
- Compensation plan
- ESOP (Employee Stock Ownership Plan)
- Estate and gift taxes
- Incentive stock option program
- Initial public offering
- Lease vs. buy option
- Liquidation or reorganization
- Pre- or post-nuptial planning
- Succession planning
The above article was retrieved from the “E-mail alerts” disseminated by Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants to clients and friends of the firm. With offices in Mount Laurel, Morrisville, PA and Franklin Lakes, NJ, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com or by calling 856-222-4723.