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Business Valuations

(What is my business worth?)

Ownership in a closely held small business often represents a large and significant part of an individual's or family's estate and investment portfolio. Unlike owning stock in a public company, where market value is easily determined by simple reference to the exchange in which it is listed, the market value of an interest in a private, closely held business is generally unknown and usually quite complex and challenging to determine.

The consequences of not knowing, and properly documenting, the value of a privately held business can be devastating and have very expensive repercussions, especially in cases including the death or disability of an owner, disputes between business owners or partners, an uninformed sale or purchase of a business interest, a divorce, a disruption of the business, planning for succession, and many other instances.

Some situations where an accurate, verifiable valuation is a must:

As indicated above, there are many reasons why a business may need to be valued. One of the most important reasons for a business valuation includes its usefulness as a management tool. A business valuation performed on a periodic basis (perhaps every two or three years) can assist owners in determining their degree of success and management effectiveness, determine strengths and weaknesses of the business, and identify improvements that may be needed in order to maximize its value to the owners.

Here are some other more common reasons why a business valuation might be required:

  • Estate and gift tax planning and preparation
  • Purchase, sale or merger of a business interest
  • Divorce settlements
  • Buy/sell agreements
  • Fairness opinions
  • Lost profits or economic damage claims
  • Partner/owner disputes
  • Business dissolutions and/or liquidations
  • Gifting through family limited partnerships or limited liability companies
  • Planning for the succession of a business
  • Disruption of a business
  • Evaluation of life insurance needs
  • Charitable contributions
  • Acquisition of financing or capital
  • Dissenting or oppressed shareholder actions
  • Eminent domain proceedings
  • Litigation support and expert testimony

How is the value of my business determined?

The true value of a business interest is based on two types of assets - tangible assets (real estate, furniture, fixtures, machinery and equipment, etc.), and intangible assets (goodwill, name recognition, customer lists, location, trademarks and copyrights, workforce in place, special processes, etc.). Quite often the value of a company's intangible assets can be substantially greater than its tangible assets.

Properly valuing a business, especially intangible assets, requires substantial skill, experience and training on the part of the valuation professional. A thorough analysis of the business must be made including historical financial analysis to determine true profitability, future potential and overall financial health. An evaluation of the company's current strengths, weaknesses and vulnerabilities must be made, competitive factors must be taken into consideration, as well as the capability of management and the company itself, the impact of the national and local economy, the future economic prospects for the industry in which the company operates, etc. Issues related to control and marketability found in the business interest must be additionally evaluated.

How much time is required in preparing a proper business valuation?

It can easily take as much as 40 to 60 hours to prepare a thorough analysis of a company, to make a proper determination of value for the enterprise, and to document the findings in a professional report. The amount of time required can be substantially influenced by the availability of quality, accurate financial records as well as the overall purpose and desired use of the report.

Why can't I just use industry "rules of thumb" to value my business?

Industry "rules of thumb" are simple, extremely generalized formulas based on an industry average of similar companies sold in the past. They generally determine value based on some multiple of sales revenues or net earnings. It is important to note that the very term "averages" would accurately suggest that the true value of most companies would fall either above or below the average values determined - and quite often these variances could be very substantial. Furthermore, no two companies are alike, which would leave such generalized "average" comparisons of little practical worth.

Although it may provide some limited interest to compare these rules of thumb to a proper valuation report on an "after-the-fact" basis, rarely do they lead to any accurate or meaningful conclusions. Use of these rules of thumb are therefore highly discouraged and sharply criticized by qualified valuation professionals. They may appear to be relatively simple on the surface, but most often their use will produce misleading results.

Litigation Support and Expert Testimony

In addition to providing the business valuation services referenced above, at Kilpatrick, Luster & Co., CPA, PLLC we further provide full litigation support services and expert testimony in business valuation cases as well as in other accounting, tax and professional related matters. We have the experience to consult with litigants and their counsel, to provide expert testimony in court or in arbitration/mediation proceedings, to help assess the quality of a case, to assist in the development of appropriate questions to ask the opposing expert or parties regarding a case, to critique an opposing experts work, and to assist in potential settlement negotiations.

We have the expertise needed in properly performing "forensic" accounting services, in reconstruction of accounting and tax work, and in the detection of fraud or misrepresentation in financial statements, reports and various tax returns.