Business Valuation
Selling a business without knowing what it’s worth is like flying blind. A properly priced business, justified by a valuation, sells more easily than an overpriced one. A valuation is an objective, independent appraisal from professionals who have the training and experience to establish the value of privately-held businesses. Due to our industry experience, we are often retained to appraise information technology companies and other businesses for a variety of reasons including:
· Assisting Buyers and Sellers of Privately Held Companies
· Positioning Businesses for Sale
· Valuations for Buy/Sell or Stock Purchase Agreements of Shareholders
· Employee Stock Ownership Plans
· Shareholder Disputes
Private companies do not participate in the public stock market, in which the value of public companies is set each day by “the market”. Either a private valuation must be performed, or a transaction must occur, to determine the value of a private business. Upon closer examination, one sees that every private company actually has several different values, depending on the reason for the valuation. For example, an appraisal to determine the open market value yields one number – the market value. An appraisal to determine the value for legal or tax reasons yields the fair market value; appraisal to determine the secured lending value yields the collateral value of the business. There are a number of reasons for a valuation, and hence different “values” that may exist at the same time for one company. We work with our clients and with independent appraisers to determine the appropriate value(s).
We offer three types of valuations to fit your needs and your budget. They range in size, complexity, and amount of documentation.
Complete Appraisal – Self Contained Report
This is a formal presentation of the value of a business in a self-contained written report that follows all of the required guidelines of Uniform Standards of Professional Appraisal Practice (USPAP). If a valuation has the potential to go to court, or if the report needs to be reviewed by others such as the IRS, this type of report explains in detail how the value was derived. This type of valuation is typically used for litigation support, large and complex transactions, initial implementation of an Employee Stock Ownership Plan (ESOP), and cases in which there are many “intended users”.
Complete Appraisal – Summary Report
Although USPAP and the American Society of Appraisers specify a single format for written reports, many appraisers also offer a “summary report”. The Institute of Business Appraisers acknowledges this report in IBA BV Standard 4.1 and notes that “By its nature the letter form of report is an instrument of brevity. It should contain at least a summary of the material factors that led to its conclusions, but is usually intended by the parties [to the appraisal engagement contract] to reduce the normal appraisal burden of writing a comprehensive report, and thereby allow the client to realize some economic benefit. However, the appraiser is still required to perform materially the same investigation and analysis as would be required for a comprehensive report and maintain in his files the work papers necessary to support the conclusions stated in the letter form report.” Summary reports are usually 30 to 60 pages long and are used to support merger or acquisition activities, SBA or conventional financing, estate tax or gifting purposes, or any matter where the intended users are familiar with the subject to be valued.
Calculation of Value
Although USPAP has eliminated language referring to “Limited Appraisal”, the American Institute of Certified Public Accountants (AICPA) recognizes a “Calculation of Value” also known as “Value Calculations”. A calculation of value is NOT an appraisal because the appraiser is not coming to a “conclusion of value”, but merely a “calculation of value” based on a limited amount of investigation and due diligence. Although a Calculation of Value does not meet USPAP or IBA Standards, it can be a valuable tool for business owners or professionals. Typical uses are as follows:
- Assisting an owner or intermediary to establish an initial asking price for the potential sale of a business
- Estate planning
- Business planning
- Developing a “preliminary” value for litigation matters
- Any matter where an “initial” or “calculation” of value is acceptable
Most appraisers use three broad valuation approaches: income, asset, and market. The income approach uses methods that convert anticipated financial benefits into a present value. The asset approach uses methods based on the value of the underlying assets of the business. The market approach uses methods that compare the company to similar businesses that have been sold. The appraiser may select which approaches to incorporate into the final value conclusion, in order to provide the best fit for the company and the circumstances.