Business Valuations by Lance Wallach
Get your business valuation here!
Call us at 516-938-5007
Get your business valuation here!
Call us at 516-938-5007
Are You Really Prepared for the Valuation Litigation Meat Grinder?
By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Call Lance Wallach, Carl L Sheeler at (516) 938-5007
Call Lance Wallach, Carl L Sheeler at (516) 938-5007
Received your ABV certification. Check. Or your CVA certification. Check. Pulling down an extra $20,000 to $50,000 for the firm. Check. Performing 2 to 4 formal reports annually. Check. And you now have five years under your belt with 20 or so reports completed and while you haven’t memorized AICPA’s SSVS-1, you know it addresses valuation standards applicable to CPAs. Check. Check.
So, why is your former $50,000 annual billings $20 million annual sales metal fabrication client the firm has been serving for the past decade suing your firm and you for $4 million plus damages and your E&O insurer has declined coverage?
To Read More Click On Link: http://www.hgexperts.com/article.asp?id=30046
To Read More Click On Link: http://www.hgexperts.com/article.asp?id=30046
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Business Valuations: What Businesses Can Gain From Them
A business valuation measures the worth of a business on the open market. It analyzes the company’s management, capital structure, future earnings potential and market value of its assets – and can be critical to running a successful enterprise.
Business valuations are often performed during a sale, merger or divorce proceeding. But every business can benefit from an annual valuation. After all, a business is typically the owner’s largest asset – and understanding its true worth can lead to opportunities for greater success.
The Information a Valuation Will Return
Business valuations are full of information essential to running a successful business, including:
· Details about the reason for the valuation.
· A description of the company and its market position.
· An analysis of risk factors specific to the business and industry.
· An assessment of economic conditions and industry trends.
· Detailed past and projected financial statements.
· A review of valuation methods, and justification for those selected.
· An estimate of value, typically based on a weighted average of the various valuation methods.
Using This Information to Your Advantage
A business valuation allows owners to make informed decisions when working on long-term or expansion planning, retirement planning or estate planning. Without one, you could be making plans based on an underestimated value, and foregoing tax-saving strategies. On the other hand, an inflated view of your business could result in wasting time and money on a business that’s not worth as much as you thought.
The economy affects the value of every business, based on prevailing market forces. Armed with up-to-date economic information, a business owner can make solid decisions, such as putting off buying equipment or hiring employees. Or, he or she may decide it’s time to borrow money to fund an expansion, or tighten up on expenses to save cash.
The valuation’s thorough review of industry trends can be used to gauge where a business stands, compared to its competition. For example, if your business is not performing to the same level as comparable companies, you may be compelled to find out why. Without this information, it could be years before you discover you’re behind your competitors – and too late to catch up.
Do You Really Know What Your Business is Worth?
Many business owners rely on internal financial statements to determine the company’s value. But a professional business appraiser will take a thorough approach – so you have a highly accurate picture of your business’s worth.
The appraiser will gather a great deal of information about the business, the industry in which it operates, current and projected economic conditions and other factors that affect value. In most situations, the various accepted valuation methods will yield different results. For example, the income approach bases value on expected income generation, while the asset approach bases value on business’s assets. The market approach bases value on past sales of shares in the business or a similar one. Each approach will supply a range of reasonable values, which are supported by valid means of justification. In any case, you’ll have a clear and accurate snapshot of how well your company is doing – or not. Without a professional business valuation, you could be at a serious disadvantage.
An Annual Valuation Can Keep You On Track for Growth
Business valuations should be included in every business owner’s plan
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The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Chapter One
Meltdown
Muhammad Ali: “Superman don’t need no seat belt.”
Airline Stewardess: “Superman don’t need no plane, neither.”
The U.S. financial system meltdown has grimly scythed decades of accumulated business profit, investment and personal wealth. As we have seen, investors undervalued their own rationality and overvalued chaotic wealth management schemes masquerading as complex asset management in a global economy. Investors dumped business earnings, pension assets and personal funds into investment portfolios without due diligence as to the logic and structural soundness of those investments and their strategic economic orientation.
Counter-intuitively, many wealthy investors and business owners took leaps of faith with hard-won assets into complex investment schemes they didn’t understand because returns were bountiful. The hard work processes by which investors grew their business or their wealth didn’t seem to apply to strategically marketed programs devised by Wall Street wizards. “The wizards must be smarter and more inventive” was the mantra. It was an era where not paying attention yielded robust earnings.
THE PARTY’S OVER
The charlatans have now been revealed and returning to earth awash in lost assets has been a hard lesson learned for many business and personal investors. Fear of any kind of strategy beyond the most basic principles of accounting math has turned financial markets into rigid, ossified institutions. Credit is tight; doubt is rampant. But fear need not overtake common sense. If one is strategically poised to act, there are methods to reap opportunities even within the constant inhalation of a bad news economy.
There are ways to maximize wealth assets through sound tax strategies aimed at reducing exposure to IRS audits, while freeing liquidity for further investment income growth. Part of the picture is understanding what the U.S. government has and has not done in the financial sector.
The U.S. Government failed to regulate its own legislative loosening of the credit and investment markets. The government allowed financial businesses that previously dealt in single issue items, such as credit allocation (banks), insurance (insurance companies) and tax protection (accounting firms) to become full service investment/banking/insurance hundred-headed hydras. With the ability to manipulate different asset classes, many of these businesses grew astronomically by forging new markets out of fringe niches and clients they previously would not have pursued.
Much of the growth was built on Ponzi-type schemes of trading one asset class for another, rebundling (while claiming it was an asset protection maneuver), and charging transaction and management fees for transferring and translating assets into different holding tanks. Ethical portfolio diversity became a joke.
Forensic auditors will spend years trying to unravel the origination of lost portfolios and their mutation into worthless products that propped up marketing schemes.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.comNational Society of Accountants Speaker of The Year
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.comNational Society of Accountants Speaker of The Year
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
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New BISK CPEasy™ CPE Self-Study Course
Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Excerpt:
By Grant Webb. To become a CPA who performs business valuations means you’ve truly mastered your trade. Bisk trains accountants to become CPAs to broaden the scope of one’s possible accounting careers.
Whether you are looking to court investors for expansion, selling, or just want to accurately gauge the value of your business, a formal business valuation is an important tool. Many business owners are so focused on building the company, staying ahead of competition, and keeping aware of market trends that they seldom stop to take a good look at what they have accomplished. A business valuation offers the opportunity to put a value on the entire business and may be used as a lens through which to focus future efforts.
The Process of Business Valuation
In general, a CPA will provide a list of documents you will need to assemble in order for the process to begin. This necessary as there are many different methods for business valuations. You will generally fill out a questionnaire and meet with the CPA who will then compile all the information into a formal business valuation. Sometimes this is completed entirely online. Follow-up may be needed. For a small company the process can usually be completed within a month or less. The main documents you will need regardless of valuation method are your tax records for the past several years, any other records regarding cash flow, and any recent investments/improvements that have been made.
If there are multiple stakeholders in the company’s assets you will need to provide that related supporting documentation, as well. The valuation takes into account current economic conditions and can also provide the value for each stakeholder’s part of the company based on the documentation you provide.
While many business owners conduct a valuation for personal knowledge, others need it when one partner wants out, or if a third party has made an offer to buy it, or if a divorce is looming. Having a highly regarded and experienced CPA do the job is important since the findings may have legal implications, especially if the dissolution of a partnership is part of the motivation for the valuation.
The Benefits of a Business Valuation
Knowing what your business is worth based on the current economic conditions is important as a tool to clarify future actions. You may decide now is not the time to sell, or you may look to sell the business in an area where similar businesses are needed and you may secure a better deal.
If a partner wants out (or in), a business valuation will clarify how much money each person’s part of the company is worth. This may help to mitigate conflict when someone wants out of the business and is asking for more than what the other owners think is fair. Looking at a business valuation in the context of a whole business strategy plan, the valuation process may serve to clarify fertile areas of expansion. The business valuation process can be used as a time to re-group and strategize for future success. Some business owners choose to use the valuation process in conjunction with meeting formally with strategy consultants.
In markets enjoying rapid growth, having a recent valuation complete may mean that if an eager buyer comes knocking you will have a solid ball park estimate of the range of offers you will seriously consider. A business valuation may also be helpful if you are looking for ways to streamline your company and sell off part of it or possibly buy out another owner. Often the process begins for one reason or other, but then evolves into a more comprehensive look at overall short-range and long-range planning. Embraced fully, the business valuation process can be a powerful part of large plan to build a more focused company goal set.
Other Considerations
For business owners seeking to obtain a comprehensive look at what their business might be able to sell for in today’s economy, a business valuation completed by a certified CPA may be a strong tool for clarifying perspective and direction. In the case of mitigating internal squabbling among stakeholders, or in the case of a pending partnership split, the process is invaluable. While some business owners come to a business valuation as part of pending litigation, such as a divorce, others choose it voluntarily. As such, the business valuation becomes a strategic tool for leveraging more power in future company investment, expansion, and development. While many methods exist for assessing a business valuation, the assistance of an experience and full certified CPA may be your best ally in securing the most accurate, dependable, and respected business valuation.
ABOUT THE AUTHOR: Lance Wallach, National Society of Accountants Speaker of the Year.
Lance has written numerous books including Protecting Clients from Fraud,
Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s
Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling
books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small
Business Hot Spots. He does expert witness testimony and has never lost a case. Contact
him at 516.938.5007, wallachinc@gmail.com or visit www.taxaudit419.com or www.taxlibrary.
us.
Copyright Lance Wallach, CLU, CHFC
More information about Lance Wallach, CLU, CHFC
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
When it comes time to sell your business, you will need to come to the negotiating table armed with facts and support to back up your position on your company’s valuation. Focus your energies on the following areas when considering an appropriate working capital target:
- What is normal for the industry?
- What is working capital as a percentage of sales?
- What special terms cause the company’s working capital to vary from normal levels?
- How significantly does inventory vary on a month-to-month basis?
Also be wary of the following common due diligence working capital findings that could indicate a requirement for higher working capital:
- Lack of sufficient receivable or inventory reserves
- Cut-off issues on an interim basis
- Individual accounts that should be excluded, such as accrued interest
- Missing accruals such as vacations, payroll, bonuses, warranty, sales allowances, etc.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
The ABV is the business valuation credential granted by the American Institute of Certified Public Accountants (AICPA). To be eligible to apply for the ABV credential, a candidate must:
- Be a member in good standing of the AICPA
- Hold a valid and unrevoked CPA certificate or license issued by a legally constituted state authority
- Pass a comprehensive Business Valuation Examination
- Provide evidence of ten business valuation engagements that demonstrate substantial experience and competence
- Provide evidence of 75 hours of life long learning related to the business valuation body of knowledge
The ABV designation certifies that you are working with an accredited valuation professional—a CPA who brings added value to a valuation engagement. As a CPA/ABV, we combine a sophisticated understanding of accounting, taxation, financial statement analysis and business operations in many different industries with proven competence in valuation. Building on our core competencies, the ABV gives us an advantage in meeting your valuation needs.
Lance Wallach
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
68 Keswick Lane
Plainview, NY 11803
Ph.: (516)938-5007
Fax: (516)938-6330 www.vebaplan.com
National Society of Accountants Speaker of The Year
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
The ABV is the business valuation credential granted by the American Institute of Certified Public Accountants (AICPA). To be eligible to apply for the ABV credential, a candidate must:
- Be a member in good standing of the AICPA
- Hold a valid and unrevoked CPA certificate or license issued by a legally constituted state authority
- Pass a comprehensive Business Valuation Examination
- Provide evidence of ten business valuation engagements that demonstrate substantial experience and competence
- Provide evidence of 75 hours of life long learning related to the business valuation body of knowledge
The ABV designation certifies that you are working with an accredited valuation professional—a CPA who brings added value to a valuation engagement. As a CPA/ABV, we combine a sophisticated understanding of accounting, taxation, financial statement analysis and business operations in many different industries with proven competence in valuation. Building on our core competencies, the ABV gives us an advantage in meeting your valuation needs.
What is your business worth?
Whether you are thinking of buying a new business, selling the company you’ve built over many generations or in the midst of a difficult divorce, the amount attached to the value of your business is important. We can provide useful and objective analysis to assist you in the valuation of any business in which you have an interest. AKT valuation services assist CPAs and other financial advisors in moving business owners forward to implement succession and estate plans.
The professionals of AKT have been involved in many valuations in widely diverse industries including our large niche in the healthcare industry, retail and wholesale operations, agriculture, building materials, computers and information technology services, construction, private post-secondary schools, manufacturing, processing, professional services, real estate, telecommunications, transportation including automobile dealerships, and utilities.
Our professionals in Business Valuation Services are skilled in providing expert appraisals for:
- Acquiring and divesting a business
- Business succession and buy-sell agreements
- Estate plans, gifting and estate tax filings
- S Corp. conversions
- Purchase price allocations
- Family Limited Partnerships and LLC’s
- M&A strategies
- Employee benefit plans
- Financing
- Strategic corporate planning
There are three categories of valuation services to serve your business valuation needs. These include a formal valuation opinion, a preliminary indication of value and valuation consulting services. The nature of these three levels of service is described below.
Formal Valuation Opinion
To provide a conclusion of fair market value, we are required by our certifying organizations to perform a detailed analysis and study of the company, its industry and the markets in which it operates.
Both internal and external factors that influence the value of the company will be reviewed, analyzed and interpreted. Internal factors include, but are not limited to the company’s financial position, results of operations, and the size and marketability of the interest being valued. External factors include, but are not limited to the status of the industry and the position of the company relative to the industry.
To enable us to issue a formal valuation opinion we will analyze financial statements, financial information and other data obtained from management; visit the company; interview management; research the company’s industry, customers and competitors; search for guideline companies; and perform other procedures necessary and appropriate to render an opinion regarding the fair market value of the company. We will also prepare a written valuation report based on our analysis.
Preliminary Indication of Value
This type of engagement is generally substantially less exhaustive than the procedures necessary to issue a formal valuation opinion.
The extent of procedures to be performed will depend on your requirements. In addition, under your direction, a written report may or may not be prepared.
Our fee to prepare a preliminary indication of value is dependent on the extent of procedures to be performed and whether a report is to be prepared. For informational purposes, this type of consulting engagement generally consumes 40% to 60% of the fees for a formal valuation opinion.
In Part 1, we addressed the woeful inadequacy of education and experience of the accounting professional who chooses to dabble in a niche sector to make a few thousand dollars and why the AICPA, IRS and the Courts have brought the hammer down and the knowing or unwitting practitioner learns s/he is facing penalties, sanctions, fines, lawsuits and no E&O coverage. Game over.
An illustration of what to do. A large Boston based CPA firm that has a department of full-time valuation professionals outsources their work to our firm when an audit or tax preparation creates either a perceived or actual conflict of interest. In a case, where the value of a 99.5% Member Interest in an LLC holding $65+ million in marketable securities as of early 2009, was opined with a 42% discount. The IRS challenged the discount having recently prevailed on the Estate of Holman with a similar fact pattern where the discount was disallowed and the gross estate was at full fair market value.
Due to the review of the partnership agreement and fund of funds agreements as well as indicating how the market volatility has caused even small cap public companies to lose 40% or more of their value, we were able to show that the Member interest was an economic one with no voting rights and a holding period likely to be at least 12 to 18 months necessitated the discount. The taxpayer prevailed.
An illustration of what to do and what not to do. Taxpayer’s CPA applies an aggregate -30% discount to a transferred partnership interest citing several court cases where such discounts were permitted and relying upon the averages of various restricted stock and IPO studies. The IRS sent a Notice of Deficiency disallowing the discounts for absence of proof as to the level of the discount. We were retained and argued for a -55% discount and the taxpayer achieved a -45% concession. (First. we always refer to buyer and seller as investors. Second, we outline all the impairments of the entity and equity level as “risks”, whereby an adjustment would be warranted and usually referred to as concessions versus “discounts”. Third, we discuss the likely number and risk preferences of the pool of buyers based upon indexes of the asset class performance over a defined holding period with an eye towards the capital markets. Fourth, we prove up the discount is appropriate by showing the risk/return makes sense.
The first example is an accounting firm that knows what it is good at and where/when to outsource, the second was plain and simple incompetence, because the training the CPA received isn’t adequate to simply and arbitrarily apply a discount without examination of case specific factors. The CPA lost the client and was penalized for gross under-valuation of the equity interest – a severe fine. Having a doctoral dissertation addressing illiquidity is less important than understanding the private capital markets, which most dabbling CPAs seldom do. If they had, they’d see most of the issues are financial and operational and not accounting and tax related. The client may not know the difference. The AICPA, the IRS and the Courts expect the CPA firm to know better and not misrepresent through omission.
Divorce
In a divorce situation the business is often the most valuable asset in the marital estate. Whether you are the “in” spouse involved in the business or the “out” spouse, a valuation is an integral part of the divorce proceedings to ensure an equitable division of assets.
Estate and Succession Planning
Knowledge of the value of a business is crucial to effective estate/succession planning. Proper planning ensures the future distribution of the business assets has minimal tax consequences and prevents a liquidation of the company. Additionally, a supportable valuation is essential in establishing value for estate or gift tax purposes.
Buy/Sell Agreements
Proper planning and proper installation of a buy/sell agreement is essential for the future well-being of your business and your family. Our valuation team can work with you and your attorney to develop appropriate values and/or provisions for use in your buy/sell agreement.
Shareholder/Partner Disputes
In contentious situations, it can be beneficial to have a neutral third party help you determine the value of the business. A valuation team with solid valuation expertise can help assure you that the dispute is being settled fairly.
Litigation Support
A properly prepared business valuation can prove extremely helpful in legal disputes including the following situations:
- Divorce proceedings
- Shareholder/partner disputes
- Economic damages
- Liquidations
ESOP Transactions
Employee Stock Ownership Plans (ESOP) continue to be an alternative to selling a company to an outside party. An added benefit is the tax advantage to the current owners. However, if a company’s stock is not publicly traded the Department of Labor requires annual valuations to support the stock transactions that occur during the year.
We are skilled at valuing small, owner-operated businesses with annual sales of less
than $5 million. Some of our valuations are related to the buying or
selling of a business, and are used to make critical decisions like: whether to buy or
sell, how much to offer or accept, and how much to lend. In these situations,
valuations must be realistic and reasonable to be of any value.
Small, owner-operated businesses are different than larger companies. Obviously,
they are smaller (revenue, assets, employees, locations, territories, etc.) and they
operate according to a unique agenda set by their owner(s). Although general
valuation concepts and theories still apply, the data and methods used must be
relevant and adapted to accurately value a small business. Unfortunately, many
valuation firms apply the same data and methods they use for larger companies.
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5 APRIL 25, 2013
BY LANCE WALLACH
The IRS is taking a “formalistic approach” in interpreting its own Section 6011 regulations on disclosing reportable transactions, but not following its own rules on which tax years to assess the Section 6707A penalty.