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The Center for Financial, Legal & Tax Planning,
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Articles ·
Maximizing
Your Business (05-05) ·
LLC, S CORP., & C CORP.:
WHAT’S THE DIFFERENCE? (05-03) ·
American
Jobs Creation Act: Explanation and Strategies (04-12) ·
Conditions
Favorable: Consider Selling Your Business Now (04-12) ·
EXIT PLANS: HAVING ONE IS
ALWAYS IMPORTANT (04-11) ·
Is There “Value” in a
“Valuation”? Part 2 (04-08) |
Is There “Value” in a “Valuation”? Part 1 of a 2 Part Series
By: Bart Basi &
Roman Basi I
walked into a small confined industrial shop with my client and looked
around. I immediately recognized the
blood sweet and tears that had been poured into this company over the
years. Could someone put a value on
this business, built from the bottom up, supported by reputation and
goodwill, and the hard work ethic of the employees? The owner (seller) looked at me and asked
how a valuation of his company could be determined, what would be needed, and
what to expect in terms of cost, time frame, and future valuation needs. The owner was selling his business and we
had been hired to value the company for the buyer. It helped to explain to the owner the
importance of a valuation, the documents and information that would be
required in order to complete the valuation, and what expectations he could
expect from a valuation. In
this two part article, we will address those same issues regarding valuations
and also identify the major components of a valuation. Part I will present the various purposes of
a valuation and what you need to have one completed. Part II will discuss the qualifications of
an appraiser, how the valuation is done, and what to expect from the results
of the valuation. What is the Purpose of a Valuation? There
are many different purposes for which you may want to have your company
valued. First and foremost is that you
may be contemplating selling your company and have no idea of the actual
value. A valuation will establish a
range in which you can feel comfortable knowing this is the average price a
willing buyer would purchase the business for in this economy. Without a competent valuation, if you sold
too quickly, you would be forever wondering whether the price you sold for
was too low. In reverse, if the
company is taking too long too sell, your hindsight may ask you if the price
is too high. A valuation will cure
this second guessing by giving you definitive benchmarks from which to guide
your decision making process. You can
leave the transaction feeling that you made a competent decision and one that
was economically feasible. No one is
willing to buy a company that has not determined a value. The valuation step in the process of
selling your company is the most crucial element of a profitable transaction. |
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The second reason for a valuation is if you are purchasing a
business. If purchasing another
company, the selling party may not have done a valuation, or you may not
agree with the one that was done. A
valuation is done to provide you with a benchmark from which to compare the
prospective purchase. If you are still
in the market for a strong company, but have not yet identified a potential
target, having a valuation of your own company will give you the ability to
spot a good deal, and recognize that an investment should be made. Do you know where you should be spending your money? Do you know what activities and markets
increase your company’s value the most?
These are additional reasons to have a valuation completed. You can easily gauge the success of your
company by completing an annual valuation.
By constantly updating your valuation, you will be able to monitor the
increase in value due to such things as advertising, product lines, and
integration of existing products.
Without a valuation, it is difficult to determine the overall net
effect these items have on the value of a business. If you notice a characteristic that substantially
increases the net worth of the company, you can increase your attention to
that part of your business and multiply its effects on the value of your
company. All
of us in the business community have a goal.
Some goals are individual, and some may be for the company that we
operate. A valuation will help to keep
you on track to reach these goals, and inform you of how far off you are, or
how close you are to reaching the end point.
Your goal may be to sell the company for a certain price in a number
of years; by updating your valuation on a regular basis you will be able to determine
whether the value has increased enough to meet this goal. Is
your financing adequate? Could it be
better? Perhaps a lower interest rate,
or additional capital would allow you to obtain certain projects. A current valuation can help to show the
banker your actual financial position.
It can also help to show the bank that you are on top of the current
status of the company, and that it is being monitored all the time. Spending a few dollars for a valuation
could mean real savings when it comes to the financial capabilities of your
company. Another
reason to have a valuation completed is the case of a company
dissolution. Whether this has to do
with a corporation, or a simple partnership agreement, a valuation can be the
key to a smooth “winding up” period.
In troubled times such as dissolutions and break-ups, nothing can be
more stressful than trying to determine the value of the company, and the
value of each individual owner.
Arguments over value can be substantially reduced resulting in huge
savings for the company in terms of legal fees and wasted time. If
your company is growing, you may be seeking partners and investors. Having a current valuation of the company,
and comparing it to past valuations is a great tool in attracting investment
dollars. Anyone can walk into a
company and attempt to get a feel for the success and commitment that may be
involved. But armed with a current
valuation, some of the fears may be lessened and the picture will be much
clearer. A
valuation is also an effective tool for your employees. If you are thinking of an ESOP (employee
stock ownership plan), the value of the stock in the ESOP must be determined
annually. Therefore, your employees
will know the current value of their interest in the company. In
the unlikely event that a case should arise involving breach of contract,
loss of business opportunity, antitrust violations, condemnations, or other
legal issues, the valuation of the business will help aid the court in
reaching a reasonable damages award. And
finally, a valuation should be performed for estate planning. Not only does the IRS require a valuation
to be done in order to assess the proper estate and gift taxes, but having a
valuation referenced in your will can help to eliminate costly and damaging
will contests. It will also give you
the peace of mind knowing exactly how much you have passed on to
individuals. Rather than trying to
guess the value of the gift of your company, the valuation will help to
identify the specific value that will now be associated with that gift. What Do I Need Once you have determined a purpose
for the valuation, it is then common to ask, what do I need to help complete
the valuation? It is important to
gather certain information to help accelerate the process, and provide a true
and accurate picture of the position of your company. The following presents a list of some of
the documents and items that need to be gathered in order to complete a
valuation: 1.
A statement as
to the objective and purpose of the valuation. 2.
A brief
description of the history of the company. 3.
A separate
sheet for each key person in the organization showing their experience, job
description, and position of importance. 4.
A list of
stockholders and the number of shares each individual owns. Include the manner in which the shares were
obtained (i.e., gift, purchase, or inheritance) 5.
A complete set
of three years’ financial statements, with attachments. Including cash flow statements, if
available. 6.
The most
current three years’ federal tax returns, along with any gift returns. 7.
A line card or
similar document identifying different manufacturing firms and products
represented. 8.
Copies of any
contracts with major suppliers. 9.
Copies of any
key documents involving stock certificates, such as buy/sell agreements. 10.
The front page
of any company owned life insurance policies on the lives of any
employees/officers/owners. 11.
A list of the
top ten key customers (those on a regular basis) of the company. 12.
Totals from
the accounts receivable aging sheets, related to the most current financial
statement. 13.
A list of
employee loans and/or stockholder loans, either from the business or to the
business. In addition, copies of any
loan documents relating to the debts. 14.
A list of all
the equipment owned by the company (even if previously written off) and the
fair market replacement value of that equipment. (You may use a depreciation list as a
guide) 15.
A summary list
of any loan agreements with banks coupled with copies of loan documents
placing restrictions on any transfers of stock and/or borrowing capacity. 16.
An analysis of
the past three years’ sales, identifying any unusual and/or one-time sales
out of the ordinary course of the business. 17.
An analysis of
the past three years’ expenses, identifying the unusual and/or non-recurring
expenses. 18.
A complete
list of all family related benefits from the past three years, broken down by
category. 19.
A current copy
of any industry reports in which the company has participated with regard to
industry statistics and averages. 20.
Copies of any
local reports and/or publications, indicating business conditions covering
the company’s market territory. 21.
Publications
and/or reports referencing the market conditions of the customer base of the
company. For example, if you sell to
the construction industry, then new construction in your market territories
should be identified. 22.
A list of the
top ten key competitors (those on a regular basis) of the company. 23.
Pictures that
you may have of your facilities and/or operations. 24.
Copies of any
previous valuation reports conducted within the past five years. 25.
List of
publicly traded competitors. These are
just some of the documents and items that need to be gathered in completing a
valuation. Depending on the purpose of
the valuation, this list can be expanded or contracted. It is important to keep in mind that
facilitating the valuation will help to not only provide a complete and
accurate picture, but will reduce the time spent on the project which will
reduce the cost to you. Conclusion Throughout
Part I of this article you have been exposed to the many purposes for which
valuations are completed, and what is needed to complete a valuation. Large and small companies all over the
world have many different reasons for having their companies valued. However, completing a valuation is no easy
task. The documents and materials that
must be assembled and analyzed are not for the faint of heart. It takes a skilled eye and a trained mind
to determine what portions of the company are worth more than others. Hard work and dedication do figure into the
final value, and it is these factors coupled with the market that determines
the valuation range. A valuation of your company is one
component on the road to success.
Don’t let the opportunity to succeed pass you by because you failed to
understand the “value of a valuation”.
In Part II of this two part series, we will discuss the qualifications
of the appraiser, how the valuation is completed, and what you as a business
owner can expect from the valuation. If you have any questions or would like more information regarding business valuations, please contact any of the professionals at The Center for Financial, Legal, & Tax Planning, Inc. by calling 618-997-3436 or e-mailing your request to lacie@taxplanning.com. |
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The Center for Financial, Legal and Tax Planning,
Inc. |
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Satellite Office: Longboat Key, FL |
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