In determining the value of a business, a qualified financial expert will consider national and regional economic data, industry trends, the company’s financial history and outlook, history of transactions within the company and the industry, among many other considerations and factors.
Defining value
Business appraisals are preformed for many purposes, including contemplated stock and asset transactions, estate planning and litigation (such as divorce, dissenting shareholders, economic damages, etc.). Value could mean different things, depending on the purpose and how it is used. A target company could be more valuable to a strategic buyer who can implement synergistic capabilities not available to many individual buyers. Further, the definition of value, referred to as the standard of value, is often determined by the courts or the Internal Revenue Service.
As such, the purpose of the appraisal could have a significant impact on the standard of value. Fair market value, defined by the International Glossary of Business Valuation Terms, and similarly in revenue ruling 59-60, as “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts,” is used for gift and estate tax purposes. Many states have also adopted fair value for dissenting shareholder litigation and definitions of such vary.
There are other standards of value. Investment value, defined as the specific value of an investment to a particular investor or class of investors based on individual investment requirements; and intrinsic value, defined as the amount that an investor considers to be the true or real worth of a company, after completing of a fundamental analysis of the company.
What makes some companies within the same industry worth more than others? In general, the market does not like risk. The riskier the investment, the less the marketplace would be willing to pay for it. Therefore, if you are able to reduce risk you will, in turn, be making your company more valuable.
There are many factors which effect value, including the cyclical nature and outlook of the industry, economic outlook for the national and local economy, labor relations (union or nonunion), management’s experience and internal controls. A business appraiser should consider such factors, as well as industry drivers.
Other considerations include: bidding / proposal success rate, work in process, revenue sources, ability to control costs (such as labor), whether the company serves specialty niche markets or is widely diversified, profitability on specific jobs or product lines, consistency of job or product line profitability with the overall profitability of the company, current debt and equity structure, buy/sell agreements and the impact of a consummated sale.
Although there are many experts who can provide business valuation services, there is no substitute for experience, training and expertise. There are many credentials and professional organizations that provide certification, education and training.
- Accredited in business valuation — by the American Institute of Certified Public Accountants
- Accredited senior appraiser — by the American Society of Appraisers
- Certified business appraiser — by the Institute of Business Appraisers
- Certified valuation analyst — by the National Association of Certified Valuation Analysts.
There are a few simple steps you can take to make your company more valuable. Create better and more timely financial reports
- Clean up the books.
- Create an employee policy/operational manual and keep it current
- Train and cross-train your staff
- Reducing risk, ensuring that you are up-to-date and recording every aspect of your company’s evolution will assist you in making your company more valuable.
Lewis M. Baum, CPA, CVA, CFE, is an associate director with the Business Valuation and Litigation Consulting Group of Saltz, Shamis & Goldfarb Inc., the tax and accounting division of SS&G Financial Services Inc. (www.SSandG.com). Contact Lewis at (440) 248-8787 or [email protected].
