BUSINESS VALUATIONS

Business Valuation involves a process of business and financial analysis, which is conducted by an experienced analyst, in which the analyst estimates the value of a business at a particular point in time. This usually involves non-publically traded businesses which are involved in some legal proceeding which requires a determination of value. Non-publically traded companies, unlike publically traded companies, have no independent measure of value such as the value reported on a stock exchange each day. Instead the ultimate measure of fair market value is the price that a willing buyer and willing seller agree too as a result of an arms length negotiation process. The specific situations which give rise to the need for an independent valuation include the following:

At the date of death for estate reporting and inheritance purposes; For the purpose of valuing and dividing the assets in a divorce proceeding; Before or after an adverse event which has caused the business to decline in value; To determine an exiting shareholder's ownership value; To assist with pre-mortem estate planning and gift tax compliance; To meet ESOP reporting and compliance requirements; To assist in planning for the sale of the business;

Many owners of closely held businesses assume they have a pretty good idea of their businesses’ value. Often an owner may decide his or her company’s value based simply on cash flow and profit margin. While determining the value of a closely held business may appear to be a straightforward process, it is actually quite complex, involving consideration of numerous factors. A valuator must understand their impact and, more important, know how to combine them to derive a reasonable, well-supported value. To give you an idea of the factors a valuator considers, here’s a brief overview. Fundamental to a determination of a closely held company’s value, competition encompasses a number of categories, including the company’s: Relative size compared with other businesses in its industry; Relative product or service quality; Product or service differentiation from others in the industry; Market strengths; Market size and share; competitiveness within its industry in terms of price and reputation; Copyright or patent protection of its products. Management Ability Is management skilled and experienced enough to keep the company at the top of its game for the foreseeable future? Several factors can indicate management ability: • Accounts receivable, inventory, fixed asset and total asset turnover, • Employee turnover • Condition of the facilities • Family involvement, if any • Quality of books and records • Sales as well as gross and operating profit Financial Strength Consideration of financial strength entails a number of ratios, including a company’s: • Total debt to assets • Long-term debt to equity • Current and quick ratios • Interest coverage • Operating cycle Profitability and Stability of Earnings Another important factor is the financial stability of the company, as revealed by its profitability during its operating history, including: • The number of years the company has been in business and its sales and earnings trends • The life cycle of the industry as a whole • The returns on sales, assets and equity Other Factors As if this were not enough, the valuator also has to consider the economic conditions in which the company is operating, including the broad industry outlook and the impact of various Internal Revenue Service (IRS) rulings and court cases that may affect the company’s value. In addition, the valuator must analyze restricted stock studies and the values of comparable companies to determine their relationship to the company’s value. Intangible factors such as goodwill value and noncompete agreements can be significant as well. Finally, the valuator needs to determine the discount or capitalization rate of the company, specify what percentage of the company is being valued, and take into account any marketability or minority interest discounts. Putting It All Together Perhaps the most difficult part of the entire process is knowing how to combine all of these factors in a meaningful way to reach a value that will withstand any challenges by potential buyers, the IRS, dissatisfied partners or others. Only a valuator with professional training, experience and expertise will be able to accomplish this. We have experience in performing these types of valuations and possess the skill and expertise you need. Please give us a call with any questions or problems concerning valuation matters. We would be glad to help. To contact us, please write, call or email us at the following address: Richard J Proctor, CPA, CVA, Cr.FA, CGFM, DABFA Principal & Director of Valuation Consulting Reynolds & Rowella, LLP 90 Grove Street Suite 101 Ridgefield, CT 06877 Phone: 203-438-9977 Fax: 203-431-3570 Send Email To: proctorcpa@reynoldsrowella.com On a quarterly basis, we send out a newsletter covering valuation and litigation issues including significant cases in the valuation area. If you wish to receive our newsletter by email, please enter your email address below and click on go: Join the Valuation & Forensics Consulting mailing list Email: