Let the business valuation process make a real difference in your future
Congratulations on taking the first steps toward getting information will make a real difference in your life! Whether you’re selling a business, embarking on a new opportunity, or going through of any number of changes personal to you, there are some basic things you should expect from us, your business valuation partners, as we embark on accurately and objectively putting a number to what may very well be your blood, sweat, tears and years.
Before we get started, by no means do we want to diminish the hard work and effort that went into establishing and/or growing your business. It’s just important to refrain from some of the following, common tendencies that have to do with the past – but can stand in the way of your successful future:
Don’t think or act with your emotions. We know – easier said than done, right? It’s only natural for those sacrifices and long nights that often accompany owning a business to be associated with very strong emotions. Yet, as partners that have your best interests at heart, it’s important to separate those emotional memories and history from the “hard numbers.” The reality is, the buyer does not have that personal experience and history. For them, information that is not quantifiable in some way doesn’t have a bearing on your business’s dollar value.
Likewise, don’t sell yourself short. It is only natural for owners to associate the business they’ve built over 30 long years of struggles and joys, victories and failures, with a considerably higher value than what the business may be worth; however, we have also seen the opposite many times. There are owners who may think the company is worth substantially less than we find on our fact-finding mission.
Overcome the bias that you “know best”; trust in a specialist’s expertise instead. We at O’Donnell, Ficenec, Wills & Ferdig know that no one knows your business quite like you do. But what you are seeking now isn’t reinforcement of the knowledge of your services or product; it’s business valuation services – a very specialized area of the accounting world. You know how can you be “too close” to a subject? This true-ism bears out here. As the owner or founder, you may think, no one knows my company better than I do. So, when I say it’s worth [fill-in-number-here], that’s its true value. As the ultimate “insider,” we’ve found that owners may actually be worse at valuing their businesses, partly, because of some of the factors mentioned above. While you are most definitely better at managing your business, you are not expected to be better at valuing your business than a trained and experienced business valuation analyst.
Don’t get tunnel-vision. This is where an outsider’s perspective and expertise can be of benefit. We’ll give you a real-life situation here. Say, business owner Jane knows that her company is worth “X.” So, Jane automatically assumes that John’s 25% minority interest should be worth about 25% of “X.” While, at first blush, this reasoning makes sense, there are other factors to account for, which underscore the holistic and wider approach to analyzing one’s business. For instance, a minority interest is much harder to sell. John must try to prosper under the potential tyranny of Jane, the majority owner, or any other owners that may also account for the majority. Qualified business valuation analysts account for these and other scenarios and factors. So, you end up with the most successful result in the end.
With all of that out of the way and in the back of your head as you read through this, let’s get going! For starters, business valuation is not business valuation is not business valuation. When we meet with you, we may find you are best served or need in the moment a calculation engagement, versus a valuation engagement. There are real differences between the two options. A calculation engagement involves issuing a report that is smaller in scope than a valuation engagement. So, the valuation engagement involves issuing a summary or detailed report. To best understand why you may need one over another, consider the following scenarios:
Business owner A needs to determine the value of his business for internal purposes. Together with Owner A, we agree to only use pricing multiples from industry transactions to determine value. Income and asset approaches, and other methods, are not accounted for in this situation – an example of the calculation engagement.
Business owner B needs to determine the value of her business for IRS tax reporting purposes. With Owner B, we agree to use all methods that she deems appropriate when calculating the value of the business. Since there are no limitations placed on us when analyzing the resources available to determine value, this wide-scope approach is a clear example of valuation engagement.
What are your needs? Why do you want this report? What do you see as the purpose of this collection of data? These and other questions need to be answered before determining whether calculation or valuation engagement processes are best for your situation. You may not know what you need, and that’s no problem – that’s what we’re here for, to help you determine the best methods to get the information you need. And this is just the tip of the iceberg. We encourage clients be aware that, during our conversation with you, we will be asking lots of questions to better understand what makes your business tick. We’ll also request historical financial information. Your business is largely valued by using a combination of income, market and/or asset approaches.
The entire process, from the moment we begin talking until the time when we finish your report, takes around a month. Yet, this relatively short process can help to set you up for many years-worth of personal financial success. We’ve also found that some owners are in more of a “hurry” than others. So, we may consistently get the information we need with little back and forth. If you’re super-organized and have everything we may need and get it to us promptly, the report may be issued in less than a month. As with everything associated with the business valuation process, “timing” is unique to each owner and the specific client engagement at hand.
Visitors to this site will probably experience the process first-hand as they look to sell their business; however, the power of the valuation report and our expertise may also be called upon in scenarios such as:
Gifting – Do you plan to “gift” all or part of your business? In that case, you’ll need to know your company’s value for tax purposes.
Buy/sell agreements – You understand a little planning can go a long way. When someone dies, leaves the business (or whatever else the terms of the buy/sell may say), a periodic or annual valuation report can help the other owners as they look to buy that person out.
Divorce proceedings – As with other assets, the business’s worth must be determined to further determine a fair and equitable distribution of property.
Minority interest – Is granting a minority interest to one or more key employees (as part of their compensation) on the horizon? If so, it’s critical to value minority interests, and that requires having a handle on the overall value of your organization.
In the present uncertain environment (or any environment, for that matter), it always pays to have some time on your side, as well as an exceptional business valuation advisor. Too many times younger owners, for instance, won’t think about valuing the business and related issues that are lumped together as “far off, in the future” until the decision may be forced upon them, by unforeseen and often dire circumstances such as sudden illness. Additionally, there may be partners that need to be considered. When focusing on day-to-day activities, tomorrow’s planning may never come. We encourage you reach out to our business valuation team today.
Justice Coffey earned his ABV® (Accredited in Business Valuation) from the American Institute of CPAs (AICPA), the world’s largest accounting profession membership organization. He is a senior accountant at O’Donnell, Ficenec, Wills & Ferdig, (OFWF) a full-service accounting firm that will celebrate its 70th birthday next year. Benefit from Coffey and his seasoned team of business valuation, tax, accounting, litigation support, and consulting services.