One Size Doesn’t Fit All
(......and it's never too early to wish you and yours the happiest of happy holidays from all of us here at Abo and Company, LLC and Abo Cipolla Financial Forensics, LLC...)
Value Depends on Purpose
When it comes to business valuation, the appraisal process can be filled with ambiguities. Numerous professional standards can apply, each one appropriate under various circumstances, including the purpose of the appraisal, the appraisal user, and the legal arena in which the appraiser is performed.
The question is easy....What is the value of my company?
The answer, well, that isn't so easy. It may really depend on who is asking and why?
Our own business appraiser, Marty Abo, was excited to be one of 3 experts at a presentation of XPX (Exit Planning Exchange - Philadelphia) charged with bridging the gap among the numerous answers to this seemingly obvious question. He asked to share the podium with him, Michael Mufson, an investment banker with over 30 years experience to middle market companies seeking growth capital and liquidity through recapitalizations, mergers & acquisitions and private placements. Rounding out the expertise, Marty asked colleague Frank Merenda, who, with his company EAC Valuations, have provided in-depth, trusted appraisals and valuation assignments which have taken them around the world and next-door
In actual deals, such as a merger or a capital raise, value negotiations will of course be based on the unique characteristics of individual buyers and sellers (such as synergies and negotiating advantages or disadvantages), leading to the investment standard of value. In tax related purposes or in many matrimonial arenas, well, we see the concept of "Fair Market Value" often coming into play. In dissenting shareholder matters, state-mandated fair value standards are usually similar to fair market value. In financial reporting valuations, FASB-mandated fair value standards are a mix of investment and fair market value.
So you can see, when it comes to business valuations, one size definitely doesn’t fit all. Although value must always be based on objective and quantifiable data, it can vary depending on many factors. A valuator may reach a different value conclusion depending on the purpose of the valuation -- and therefore, the definition of value.
At least from our experience at Abo and Company, taxes and ownership transfers are the most common reasons for a valuation. Let’s take a closer look at how these reasons may directly influence a valuator’s approach to determining value.
Taxing authorities typically require use of a “fair market value” definition when determining value. Fair market value is the dollar amount at which property would change hands between a willing seller and a willing buyer when neither is acting under duress and both have reasonable knowledge of relevant facts.
In a tax valuation case, valuators, such as Abo and Miranda, must consider:
o The company’s capacity to earn and pay dividends,
o The company’s intangible assets,
o Comparable companies’ stock value,
o Earlier sales of business equity,
o The type of enterprise the company engages in,
o Industry conditions, and
o The stock’s book value.
If you leave stock to your heirs, the IRS will tax its fair market value. If you gift it instead, you must know the stock’s value to minimize or avoid estate tax. IRS guidelines differ, depending on which option you choose.
If you’ve recently acquired a business, you may need a valuation to allocate the purchase price among the newly acquired assets for income tax purposes. Again, valuators such as Abo and Miranda, will value your company’s underlying tangible and intangible assets, and then adjust the assets’ historic costs up or down to the price you actually paid for the business.
Negotiating a price for an ownership transfer often involves elements of stress and duress. A party may not have all the relevant facts. Ownership transfers may also possess a synergistic element that the fair market value definition doesn’t include. Ownership transfer value, or more appropriately, investment value, isn’t a precise term. If you’re planning an acquisition or divestiture, a valuator can tell you what a prudent investor would consider a proper range of values for the transaction and help you determine your investment value.
In setting the price for a buy-sell agreement, the owners may not consider fair market value “fair” among themselves. Among many issues to consider, the agreement should address the type and extent of discounts (oh yeh, do request a copy of Abo and Company’s 122 point Checklist on buy-sell agreements authored for the New York City and the New Jersey Bar Associations).
Our business broker colleagues and Michael’s world of investment banking deals with what the typical buyer will look like for the subject firm if it were to be openly marketed to the highest bidder. They might then make a distinction between a “financial buyer” and a “strategic buyer”, whereby the latter brings a definitive, buyer-specific set of skills, knowledge and assets to the acquired operations which are likely to produce higher incremental profits and therefore “value”. “Strategic buyers will typically bring a wide range of synergies to the table and are usually motivated to buy because of the operational fit between the two companies. The synergies range from cost savings to new channels of distribution to better utilization of the company’s assets. Part of the success of the transaction is linked to making fundamental changes in the way the business operates in order to achieve the synergies identified. Retention of management is often less of a concern with strategic buyers. Financial buyers tend to take a portfolio view and have a higher tolerance for financial risk. They evaluate numerous deals, have specific financial objectives and are disciplined in their approach. The acquisition criteria of many financial groups include minimum revenue thresholds as well as profitability or cash flow targets.
The quality of clothing is found in its tailoring. The same is true for your valuation. A credible appraiser’s experience should ensure that proper factors are taken into account in any valuation matter. Such a seasoned appraiser is able to tailor a valuation to fit the particular needs.
Other Reasons, Other Values
You may also require an asset valuation for financing or insurance purposes. A valuator looking at your business assets as collateral or for insurability has a different focus than one valuing the business as a whole.
In valuing assets for financing purposes, the valuator may value them under a liquidation premise. Likewise, for insurance purposes, assets may be valued at replacement cost. Both of these premises lower a business’s value because they disregard intangibles such as goodwill.
As we mentioned in a previous email alert from Abo and Company, Marty Abo, was asked to "step up to the plate" as a director for The Exit Planning Exchange of Philadelphia (XPX). XPX is dedicated to helping entrepreneurs prepare for an informed, organized and financially rewarding exit from their company. XPX's members are seasoned advisors who understand the value to an owner of having a team of advisors to support the exit process. Member specialties include law, banking, accounting, wealth management, investment bankers and business brokers, merger and acquisition professionals, insurance, business valuation, and business consultation. XPX's purpose is to help advisors gain thought leader training about the exit process, learn about the role of other disciplines and come together to form exit teams to better support their owner clients to achieve a successful exit from their businesses. Anyone interested in the organization should feel free to reach out to Marty.