Business Valuation: What is it, and do I need one?

Kaulkin Ginsberg

How much is my business worth?  This seemingly simple, straight-forward question has vastly different answers depending on whom or why you’re asking.  For owners, the answer might be based more upon the year of hard work invested in their business than its current performance.  For buyers, the answer could be influenced by the direction they believe they can take the business under their ownership.

Many owners say it doesn’t matter what value is placed upon their business today since they don’t plan to sell it, or their kids are going to take over someday.  Others will explain that an eventual sale is many years away so they won’t address it now.

This attitude is all too common among owners of accounts receivable management (ARM). Unfortunately, waiting until you’re ready to sell the business to gauge value – or when you find out that your kids have no intention of taking over – could be a very costly mistake that cannot be corrected.

A valuation establishes the worth for an entire business, or partial interest, by evaluating its historical and anticipated future financial performance.  For ARM companies, appraisers must factor in market conditions, client trends and regulations impacting their specific line of business.

There are typically four situations to consider when deciding if you should conduct a business valuation: transaction, taxation, regulation, and litigation:

Transaction – This is when most owners look to a business valuation to establish a basis for themselves or their partners prior to a partial or outright sale of their business. In this situation, a valuation provides a conclusion of value that is expressed as a single number, or a range of values. This is useful for determining the fair market value of a business and aiding in the negotiation of deal terms and structure with a perspective buyer. That being said, waiting until the final hour to determine the value of your business is not recommended. Instead, annual valuations allow you to determine current value, and identify how far you have to go to reach your financial goals. The last thing you want is to be close to retiring and excited to cash in on your hard work, only to learn that the business is worth a fraction of what you thought.

Taxation – In many cases, the value of a closely-held business becomes an individual’s primary asset, and should be protected from undue exposure to taxation. For example, you may plan on leaving your business or portion of the business to your kids and other family members. Failing to properly set up your estate could lead to excessive taxation on inheritance or transfer of ownership rights. Historic and current tax court cases have shown that the Internal Revenue Service (IRS) allows for significant discounts in value – calculated by a certified valuation analyst (CVA) – to be taken when reporting assets on an individual’s estate or gift tax return. The potential tax savings from this process could be hundreds of thousands, or even millions, of dollars. However, to take advantage of these savings, a comprehensive estate or financial plan must be in place that accounts for the business value.

Regulation – In a buy-sell agreement, or buy-sell clause, an operating agreement exists in almost every business. This establishes the methodology used by the partners or shareholders for the disposition of a departing or deceased party. A formal business valuation would assist the partnership or corporation by addressing items like the events that trigger a buyout, the funding for a buyout, and the methodology for valuing the business interest. By preparing ahead of time, you can avoid disruptions to the business that impact revenue generating activities and protect all parties involved.

Litigation – Litigation may come in any number of forms, but the result is the same: lots of stress, business distractions and it may even cause more than a few grey hairs (or worse, hair loss). Fortunately, having a CVA perform periodic business valuations and assist in formal business planning can alieve some of this stress.  In this situation, attorneys need CVAs to determine the value of a business or business interest before they can move forward with the litigation process. For ARM companies, these instances typically include contract and partnership disputes, but other issues arise such as divorces, injury cases, and dissenting shareholder actions. Hiring a valuation expert with undisputed industry expertise may be the difference between being on the winning or losing end of a dispute.

If you find yourself in any of these situations, or you simply want to determine the market value of your business, a professional valuation could be your next step. For a confidential discussion of your valuation needs, consult Topline Valuation Group, LLC. Topline is a new company founded by ARM industry expert Kaulkin Ginsberg and financial, accounting and business consulting leaders, Santos, Postal & Company, P.C. Through this partnership, Topline provides owners and executives with much-needed technical, financial and benchmarking services designed to improve decisions at the corporate and operational level.

For more information, contact Adam Freedenberg at AFreedenberg@santospostal.com.