Value Blog

I just read a post from Mary Bennett on the Blue and Black versus White and Gold debate (http://mlbennettconsulting.com/1/post/2015/03/black-and-blue-or-white-and-gold.html).  It is amazing how many people became involved with the debate over the color of a dress.  For a few days, it seemed like most people had something to say about the dress.  A week later, it is old news.  For those who missed the debate, see http://www.wired.com/2015/02/science-one-agrees-color-dress/

Back to the dress and how it relates to business valuation.  Mary made a very relevant point that struck home to the work that I do –  valuing businesses. She posted,

 “The phenomenon of the black and blue/white and gold dress is a simple reminder that we in fact do not experience the world in the same way.”  

I am not sure I could come up with a better way to explain business valuation.  The lens with which people view value can cause them to see it differently.

While we (business appraisers) used various applicable methodologies to arrive at a business value, the bottom line is that each person who considers the value of a company will perceive a different value as influenced by his or her experiences, risk tolerance, access to information about the business, intended purpose of the valuation, and specific investment objectives.   Other factors that influence perceived value include motivation, opportunities for synergies, and even lifestyle choices. Each individual’s lens most definitively colors how he or she sees the value of a business.

So the bottom line:  Is the dress black/blue or white/gold?  The simple answer is: Yes.

In the world of valuation, businesses can simultaneously have different values as well.

If you have questions about this or other valuation matters, please contact me.

©2015 Florida Business Valuation Group

In the world of valuation, all too often, appraisers answer valuation questions with “it depends”.  Unfortunately, the answer to the question, “what period of time is a valuation valid?” really is “it depends”.

Let me explain.  The value of an interest in a business appraisals is date specific.  It is easy to understand that the value of stock changes over time when we look at publicly traded stocks.  Rarely do prices remain the same from hour to hour, let alone day to day.  While the value of the stock of privately held companies usually do not change so quickly, the value can change.

Events and time can cause the value of a company to change.  In fact, most business owners count on the value of their investment in their businesses increasing over time.

So, depending upon the events and trends impact a particular company, the value can change over any given time period.  Changes in value can be caused be increases or decreases in sales and profitability, increases or declines in the value of assets owned by the Company, or any one of a number of factors.  For example, stock in a company which owns real estate in a market that is recovering from the recession will most likely change in value as the real estate market recovers and the real estate increase in value.  The increase in value can be compounded if the company is also recovering and has increased sales a profitability.

There is no absolute estimate for the period of time that a valuation will be valid.  If you are relying on an old valuation, the more recent it is,  the better the chances are the valuation will be valid.  Depending upon what you are using the value for, you may want to consult with your business appraiser to determine if an update is advisable.

If you have questions about this or other valuation matters, please contact me.

©2011 Florida Business Valuation Group

In my last post, I talked about the types of buy-sell mechanisms in agreements. In this post I want to focus on how to identify the appraiser and how to define value in a buy-sell agreement. For more information on buy-sell agreements, you can purchase Buy-Sell Agreements for Closely Held and Family Business Owners.

The Appraiser
Not all appraisers are the same, and not all CPAs are appraisers. It is a good idea to specify in your buy-sell agreement that an appraiser with a certification from a recognized appraisal organization will be selected. The generally recognized designations are ABV (American Institute of CPAs), ASA (American Society of Appraisers), CVA/AVA (National Association of Certified Valuation Analysts) and CBA (Institute of Business Appraisers). You can also clearly identify the selection process. Remember that the more appraisers that are involved, the higher the cost and the longer the process will take.

The danger of specifying that the company’s accountant will determine the value of the company is that the company’s accountant may have no valuation experience. You would not go to your internist for heart surgery. Why would you go a general accounting practitioner without valuation training for valuation services? Credentialed appraisers have had training in valuation and usually have met some sort of experience requirement.

Applicable Standards
Each of the appraisal organizations has a code of ethics and professional standards. You can specify that the appraiser will perform the valuation in compliance with those standards. (Generally accepted accounting standards (GAAP) have nothing to do with valuation.)

Defining Value
Stock transferred for gift or estate purposes is valued for the tax reporting at fair market value: What a willing buyer would pay a willing seller, neither under compulsion to act, and both being informed of relevant facts. The fair market value of a minority (non-controlling) interest will usually have discounts for lack of control and lack of marketability, making it equal to less than a pro rata portion of the total company value.

Since the buy-sell agreement is your agreement, you can have the provision state whatever you choose. If you want the value to be a pro rata portion of the total company value, you just have to define value that way. (For shareholder disputes, depending upon the state, discounts for small companies are ignored.) Another option is to specify that discounts will not exceed a certain percent of value. The point is you can define value any way you want. You should understand the consequences of the definition that you use.

If you need assistance in understanding how the value stated in a buy-sell agreement will impact your company, please contact me.

©2010 Florida Business Valuation Group

In my last post, you read about Chris Mercer‘s Buy-Sell Agreement triggers.  In this post, I want to highlight some different buy-out valuation mechanisms.

1. Fixed price agreements –these type of agreements have a dollar amount for a buyout.  The actual price is stated in the agreement.
2. Formula agreements –these type of agreement have a formula for determining value.  The formula can be as simple as stating the value is equal to book value on the day of the buyout or as complex as five times EBITDA plus cash and account receivable as of the last day of the month immediately before the buyout.
3. Shotgun agreements – these type of agreements provide that the exiting shareholder offers the remaining shareholder(s) an offer to buy the shares and then the remaining shareholder(s) have the option to either choose to buy or sell his or her shares.
4. Process agreements – agreement provides that an appraiser(s) determine the value of the interest at the time of the triggering event.

There are pros and cons to using each of the types of agreements.  If you are drafting an agreement you need to keep in mind what will happen if you have to buy or sell your interest under the agreement.  For example, in a shotgun agreement, will you have the funds to buy out the shares if the remaining shareholder elects to sell rather than buy?  More to the point, if the buy-sell were to be triggered by your disability, would you want to buy the shares?  If you are going to be purchasing life insurance to fund the buyout, it may be important to know what the value of the business really is.  A formula agreement makes it relatively easy to determine the price under the agreement, but the price may not equal the value.

The process agreement provides for the determination of the value when shares transfer hands.  However, care must be used in drafting these type of agreements.  There are a few options. The agreement can provide for each side to pick an appraiser and if the values of each appraiser are with 10% of each other, use the average.  If they are more than 10% apart, a third appraiser is selected by the two original appraisers.  While this methodology is fair, it takes a long time to have the appraisals finished, and can be very expensive.  A simpler alternative for the process agreement is to select an appraiser jointly when the agreement is signed, allow a neutral third party to select one appraiser, or have both sides submit names and agree to an appraiser when the time comes.  By only using a single appraiser, you can cut time and cost from the buy-out process and end up in the same place as using three appraisers.

My next post will address defining the value used in a buy-sell agreement.

©2010 Florida Business Valuation Group

In August, Chris Mercer, the author of Buy-Sell Agreements for Closely Held and Family Business Owners, spoke in Ft. Lauderdale. He graciously is allowing me to summarize information from his presentation in this post.

Most business owners do not think of the various events that could cause a buy-sell agreement to be triggered.  Chris lists the 20 “Ds” that shareholders can be addressed in their buy-sell agreements (including events which trigger the buyout provisions):

• Departure – Trigger event, the shareholder quits his job with the company
• Discharge – Trigger event, the shareholder is fired
• Death – Trigger event, the shareholder dies
• Divorce – Trigger event, the shareholder gets divorced resulting in the transfer of an interest
• Disability – Trigger event, the shareholder is disabled (should address what constitutes a disability and the length of time before this event triggers a buy-out)
• Default – Trigger event, a shareholder’s interest is transferred due to personal bankruptcy or other involuntary transfer
• Disqualification –Possible trigger event, a shareholder loses his license or regulatory approval to work in the business or to hold his or her shares
• Disaffection – A shareholder becomes dissatisfied with the company and needs to be terminated from employment (Chris indicates that this may seem like a stretch.)
• Disagreement – Shareholders reach a deadlock, the buy-sell agreement should address how to resolve the deadlock, whether it be a way to break the deadlock or the trigger of the buy-sell provisions
• Disclosure – Provisions for preserving the assets of the company, including trade secrets, customer lists and other confidential information
• Dispute resolution – Address the process for settling disputes, whether it be mediation or arbitration, and who will pay for the process
• Dilution – Can additional shares of stock be issued and will existing shareholders’ interests be protected from dilution?
• Dividends – Specifying a dividend payment policy can provide minority shareholders with the right to receive cash from the company, when profitable.  It can also provide that the company withhold dividends to pay for capital projects or to repay debt.  In any case, a policy can eliminate disagreements between minority and control shareholders.
• Distributions – For pass-through entities, profits and losses are taxed at the individual level.  In addition to clarifying the distribution process to protect minority shareholders, a distribution policy can guaranty that enough cash is distributed to pay income taxes on profits.
• Drag-along rights  – When a controlling shareholder receives an offer to purchase stock, drag-along rights can force the remaining minority shareholders to sell their stock.  (Tag-along rights provide that minority shareholders can force a controlling shareholder to sell the minority shares with the control shares.)
• Double entities – When separate companies are used for other aspects of operations, such as owning real estate, leasing employees or offshore sales, it may be appropriate to have similar provisions in each of the agreements, and have trigger events coincide with each other.
• Differential pricing – Since shareholders determine the price for buy-sell agreements, they can decide on different pricing for different events.  For example, upon death or disability, 100% of the price may be paid, whereas on termination with cause, only 75% of the price may be paid.
• Don’t compete agreements – Non-compete agreements may be separate documents, however, a buy-sell agreement can require a departing shareholder to sign a non-compete agreement or a non-solicitation agreement when his or her shares are purchased.  (Consult an attorney regarding the terms and enforceability.)
• Donate – The buy-sell agreement may restrict transfer to certain parties such as spouse, lineal descendants, siblings, trusts or charities.
• Distributions after a trigger event – Buy-sell agreements can address what happens to dividends and distributions after the trigger day, since it can often take months or years to resolve disputes.

There are numerous other provisions that could (or should) be included in a buy-sell agreement depending upon the nature and structure of the company.  Consult your attorney to write your buy-sell agreement.  It is a legal document which will affect your rights should a trigger event happen.

There are online tools if you want to take a stab at looking at your buy-sell agreement such as http://buysellagreementsonline.com/buy-sell-agreement-audit-checklist/.

If you have questions on how the different events affect value or the price you will get under a buy-sell agreement, please contact me.

©2010 Florida Business Valuation Group

After speaking to Marty Fishman, a business broker with Transworld Business Brokers, about what buyers are looking for he had the following insights: “Most buyers approach the purchase with a certain level of skepticism. Buyers want solid facts and believable information that a business opportunity is a solid investment. They want information: financial documents, business operation and facility information. Some of this information will be provided prior to an offer and some of it once there has been an executed purchase agreement with contingencies such as the complete and satisfactory review of property, books and records.”

This is in line with the things that I evaluate as a business appraiser that support the value of a business.  Those businesses with good records and documentation of business operations are worth more than businesses that are lacking.  I will go a step further to say, businesses with limited records are significantly less marketable than businesses with good records.

Since buyers approach businesses with skepticism, consistent records are also important.  As a consultant, I advise clients to rely upon tax returns that have been filed with the IRS under penalty of perjury, over hand written documents that track sales.  In cases where cash sales were not reported on a business’s income tax return (or sales tax returns), there may be inadequate documentation of the amount of unreported cash, leaving the buyer with the difficult decision of accepting the seller’s representations on faith.  I advise clients to consider that if a seller was less than truthful in reporting income to the IRS or other taxing authority, how does one know he or she will be truthful in the amount of unreported cash to the buyer.

Mr. Fishman pointed out “The selling and buying of a business is a very complex process. It involves many aspects that most successful business people are not exposed to in day-to-day operation of a company. Both parties should rely on experts trained in the sale of businesses.”

It is important to keep in mind that when you are buying or selling a business, the price is often based on a number of factors, and the buyer and seller may value the business differently.

©2010 Florida Business Valuation Group

It may seem like a cop-out for me to answer most valuation questions “it depends”.  The reality is it really does depend.  It depends upon the facts and circumstances surrounding the particular question.  Each businesses is different.  They are different because they have different organizational structures, they do different things and they have different people (with different skills) running them.

Those are not the only differences that I must consider as business appraiser.  I have to start out with the basics of valuation – what type of value is necessary for the purpose of the valuation.  Then I have consider the interest being valued – is it a controlling interested or a non-controlling (minority) interest?  All of these factors impact my conclusion of value.

You are a potential client and you call and ask, “Can I use a 1 times revenue to value my business, since that is the industry rule of thumb?” In order to begin considering my answer I need to find out what type of value you are trying to establish, the purpose of the valuation, the interest being valued and information about your company to determine if it is average for the industry.  Then you tell me,  “I only need a rough estimate.” For your protection and the integrity of the business appraisal industry, I can’t give an rough guess based on a few facts.

An opinion is an opinion,  I must develop it in accordance with generally accepted appraisal standards.  These standards provide that I need to understand your both your business and the industry that you operate in reaching an opinion of value.

While I would love to be able to give quick short answers, I usually can’t.  I am not trying to be difficult.  Think of it this way, would you want your doctor to give you a clean bill of health without every doing a physical examination or running any tests?  Probably not.

©2010 Florida Business Valuation Group

The value of a business generally includes the value of all of the tangible and intangible assets owned by the business. Whether the value of the business includes all of the assets (and liabilities) of the business will depend upon a few things.  First, either the equity (stock or other ownership interest) that owns the business can be valued or the assets used in the business can be valued.  The general rule is: buyers want to buy assets and sellers want to sell stock.  Sellers want to sell the stock or other ownership interest mostly for tax purposes.  Whereas, buyers want to buy assets for tax purposes, but also to avoid potential liability associated with the entity.

The purposes of a valuation will often dictate what is included in the value. For estate and gift tax purposes, the value is of the stock or equity interest owned.  For transactions, the value may or may not include all the assets and liabilities.  In transactions, the purchase agreement usually specifies which assets and liabilities are included in the transaction.

It is important to distinguish between what is included in the value and what is included in different multiples based on market methods methods.  For example, the multiples from BIZCOMPS®, a transaction database, are assumed to be asset sales which exclude cash, accounts receivable, accounts payable and inventory.  Other operating assets such as the equipment used in the business are included in the value arrived at using BIZCOMPS® multiples.  Multiples from the Pratt’s Stats® database, on the other hand,  are for both asset and stock sales, as indicated for each transaction.  Some transactions include the working capital of businesses while others do not.  Transaction multiples from the Pratt’s Stats ® database need to be examined for the details of each transaction.

Within industries, there are often rules of thumb used by business brokers to estimate the value of business.  Different industries treat the assets differently. Beer taverns, according to the Business Reference Guide, sell for 6 times monthly sales plus inventory OR 1 to 1.5 times annual earnings before interest and taxes OR 55 percent of annual sales plus inventory.  Other types of establishments that sell alcohol have different multiples and treat the assets differently.  Rules of thumb for cocktail lounges either add inventory back, add liquor license and inventory, OR add fixtures, equipment and inventory.  As illustrated, different multiples from different sources result in values that need adjustments for different assets and/or liabilities.

So what does all this mean?  A business valuation will clearly state whether the stock or equity interest in a company or the net assets are being valued. If a business valuation has not been done, understand the value from the multiples you chose.  If necessary adjust for assets and/or liabilities which are not included.

©2010 Florida Business Valuation Group

Unfortunately, this is true.  There are times with a business is worth more dead than alive.  The value of a business can be divided between its tangible and intangible assets.  Tangible assets are the physical assets used in business operations such as equipment, real estate and inventory.  Intangible assets include things such as the goodwill and customer lists.

In general, a business is usually worth at least as much as its net assets (assets less liabilities).  A profitable business is usually worth more than its net assets.

Typically, healthy businesses produce a return on both the tangible and intangible asset in the form of profits and cash flow.

When a business is operating at a loss, it may indicate that the intangible assets have little or no value.  However, losses can arise from situations other than diminished goodwill, such as the current recession.

If a company does not have prospects of operating profitably in the future, a rational owner would choose to close the business and sell the assets. At a loss, the company is not producing a return on its tangible or its intangible assets (assuming there are intangible assets.)  However, if the company is expected to rebound, the business can still have value.  In other words, loss companies can still have value.

The challenge is to determine what value a loss company has in excess of its assets.

©2010 Florida Business Valuation Group

I recently earned the ABAR (Accredited for Business Appraisal Review)  designation from the Institute of Business Appraisers.   The ABAR process is not a valuation, but a review of the valuation process.  The resulting business appraisal review opinion states whether the valuation report is credible.

The valuation process  is based on a body of knowledge and generally accepted appraisal practices.  The appraiser applies his or her informed judgment, based on the facts and circumstances related to the business to arrive at an opinion or conclusion of value.  The appraiser then documents the relevant information and explanations, supporting his or her conclusions in a valuation (or appraisal) report.

The business appraisal review process examines the credibility of the valuation work product, looking at the information in the report and the methodologies used.   If a report fails to disclose sufficient information, has analytical gaps or misapplies methodology, it may be found to lack credibility.

There are three types of review opinions:  a finding of concurrence, a finding of non-concurrence and a finding of no opinion.    A finding of concurrence indicates that the report is credible.  When there is insufficient information for the reviewer to issue a review opinion, a finding of no opinion will be issued.

A business appraisal review is not an opinion regarding the value of a business.  It cannot take the place of a full appraisal as a second opinion.

If you have questions regarding when a business appraisal review is needed, you can post or question or email me.

© 2010 Florida Business Valuation Group