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1. Why should I have my business valued?
2. I am gifting shares of my company's stock to my children (or my company is converting from a C Corporation to a Subchapter S Corporation). Why should I hire a business appraiser?
3. When I hire an accountant, I typically expect that s/he is a CPA. What do I look for in hiring a business appraiser?
4. Can I have my company's CPA value my business instead of hiring an independent business appraiser?
5. How long should it take to get my business appraised?
6. How much does a business appraisal cost?
7. Can a ballpark estimate of value be determined just by looking at the numbers?
8. How do you value a closely held business?
9. What are some of the most common methods to value a business?
10. Why aren't you valuing my equipment and other fixed assets individually as part of valuing my business?
11. What is "fair market value" and how might it differ from what a buyer might pay for a business?
12. What is Revenue Ruling 59-60?
13. Given the fact that I am obtaining an appraisal in connection with a litigation situation, will you be able to testify about your value conclusion?
14. Once I obtain a business valuation report, how long is it good for?
15. Is my company impacted by FASB's Statement of Financial Accounting Standards No's. 141 and 142?
16. What size clients does SVG serve?
17. Which industries does SVG serve?
18. What are the different types of valuation reports available to a client?
    
    

1. Why should I have my business valued? (top)

For many business owners, a significant portion of their personal wealth is "invested" in their closely held business - yet, they do not know the "value" of this investment. Though they may check the value of their "GE" or "Google" shares daily, they never expend the time or effort to know the value of their Company, or how they can manage and enhance that value.

Most business owners spend money for tax return and financial statement preparation with their CPAs each year (because the IRS and their banker say they must ), but never invest in a valuation, which can guide them to increased value and wealth-building strategies.

Before getting your business valued, it is important to identify what you will be using the valuation for. This will guide the scope of the appraisal and the methodology used. Defensible opinions of value are necessary for many reasons and each reason may require a different approach and utilize different assumptions. These include tax, litigation, financial reporting, strategic planning, mergers and acquisitions, among many others. Examples of situations where a business valuation is needed are outlined in our list of services.

2. I am gifting shares of my company's stock to my children (or my company is converting from a C Corporation to a Subchapter S Corporation). Why should I hire a business appraiser? (top)

If the IRS audits the gift or challenges the value for any reason, the burden of supporting the value of the business or business interest rests with the taxpayer. Without a well-reasoned valuation from a qualified appraiser, the taxpayer has virtually no basis to dispute what may prove to be an unrealistic IRS valuation claim. If a qualified appraisal has not been completed prior to filing the tax return, the taxpayer will ultimately need to obtain such a valuation when the valuation dispute arises. When faced with a taxpayer valuation based on the opinion of a well-respected, independent analyst, the IRS is essentially forced to hire an equally qualified analyst who can credibly attack the valuation opinion of the taxpayer's analyst and who can produce an opinion of value different enough to generate a tax revenue advantage for the government. The IRS will only allocate resources to pay for valuations if there is an expectation that the allocation will be more than reimbursed. It is difficult for the IRS to justify spending money to challenge a reasonable valuation from a qualified expert that is based upon widely used valuation methods.

3. When I hire an accountant, I typically expect that s/he is a CPA. What do I look for in hiring a business appraiser? (top)

Professional designations are one of the most important factors to consider in selecting a business appraiser. However, most members of the business community do not understand the differences in the various designations available to business appraisers. Some professional designations are more difficult to obtain than others, but without an understanding of the differences from one designation to another, one often assumes that one designation is about as meaningful as any other. Four professional societies currently offer designations in business valuation:

1. American Society of Appraisers : ASA's senior designation is the ASA (Accredited Senior Appraiser) which requires that appraisers have 10,000 hours of business valuation experience, pass up to four levels of exams, pass a standards exam and an ethics exam, and submit two actual appraisal reports for peer review. As such, it is one of the most difficult credentials to obtain. The junior designation is AM (Accredited Member). ASA generally focuses on the valuation of mid-sized and larger businesses.
2. Institute of Business Appraisers : IBA's primary designation is the CBA (Certified Business Appraiser), which requires that appraisers have either 10,000 hours of business valuation experience or 90 credit hours of valuation education, pass one examination, and submit two actual appraisal reports for rigorous peer review. The junior designation is the AIBA (Accredited by Institute of Business Appraisers). IBA generally focuses on the valuation of small to medium-sized businesses.
3. American Institute of Certified Public Accountants : CPAs can qualify for the ABV (Accredited in Business Valuation) designation by passing a rigorous exam and demonstrating involvement in at least ten appraisals. The AICPA has recognized business valuation as a separate profession so that a CPA requires separate training and experience to value businesses.
4. National Association of Certified Valuation Analysts: NACVA members can qualify for the CVA (Certified Valuation Analyst) designation by completing a week-long seminar, passing an examination, and submitting a case study appraisal report. This designation is available only to CPAs. NACVA also awards an AVA (Accredited Valuation Analyst) for non-CPAs.

In summary, while all have certification requirements, only an ASA or CBA has undergone a stringent peer review process of their appraisal work product; and only an ASA, CBA or ABV is required to have a specified level of business valuation experience. So this may suggest, for example, that if you are considering hiring an appraiser who is not an ASA and/or a CBA, you may want to ask for a sample report to assess work product, since that work product is unlikely to have undergone peer review. While these designations are important in selecting a business appraiser, the amount of experience in the profession and the amount of time spent doing valuation work must also be considered. Nonetheless, given the opportunities to earn a designation in business valuation, the consumer should question the appraiser who has not earned one.

4. Can I have my company's CPA value my business instead of hiring an independent business appraiser? (top)

Sure, but only if your CPA has received formal training in business valuation (including the particular situation at hand) and there will be no perceived conflict of interest in the situation for which you are getting your business appraised.

While most CPAs have achieved a high level of competence in accounting and/or tax matters, the vast majority of CPAs do not have the necessary expertise and training to value a business. In fact, as an illustration, only about 2,000 (as of 2005) of approximately 334,000 CPAs in the country (less than 1%) have earned the Accredited in Business Valuation (ABV) designation (discussed above in the response to the preceding question) awarded to members of the AICPA who have passed a rigorous exam and have demonstrated involvement in at least ten appraisals.

Accounting and appraisal skills, although overlapping, are fundamentally different. Accountants are trained to focus on historical information. In addition to that, appraisers look sideways at comparable businesses in the marketplace, and forward at expected future performance.

In terms of a perceived conflict of interest, little else needs to be said given developments in 2002 with Enron and other companies. Throughout most valuation engagements, we work closely with our clients' CPAs (as well as attorneys and other trusted advisors) to ensure a complete and thorough appraisal of your business.

5. How long should it take to get my business appraised? (top)

It typically takes about four to eight weeks to render an opinion of value, and less to complete a limited appraisal.

6. How much does a business appraisal cost? (top)

Most appraisers quote a range of fees or charge a straight hourly rate. Expenses are billed separately. It is a direct violation of ethics and professional standards to be paid on contingency (outcome of the valuation).

When estimating fees, we give consideration to the time estimated to properly value a business. This includes time spent performing the following:

1. analyzing the current economic environment and how it impacts the company being valued and the industry in which it operates;
2. analyzing the industry in which the company operates;
3. interviewing company management and interacting with management and their advisors throughout the valuation engagement;
4. understanding the history and current and future prospects of the company, its competitive environment, its customer base, its management, its strengths, weaknesses, opportunities, and threats, its suppliers, its possible contingencies, etc.;
5. conducting a full financial analysis of the company's liquidity, activity, profitability, and solvency position;
6. understanding future prospects, including a financial forecast of the company's expected future performance;
7. researching guideline public company multiples as well as guideline M&A transaction multiples;
8. conducting sensitivity analysis and sanity checks; and
9. writing a report.

As you can guess, the business valuation process is a time-consuming one, and computer models cannot be relied upon without independent analysis and direct input.

Professionals expect to be well compensated for their time. If a quote seems low, you might want to consider whether your appraiser is doing everything s/he needs to in order to provide a well- thought out and defensible opinion of value.

7. Can a ballpark estimate of value be determined just by looking at the numbers? (top)

Perhaps, but that is akin to a residential real estate appraiser driving by a house rather than looking inside. Two identical and adjacent homes could have materially different values if one is in relatively poor condition on the inside and the other has undergone several renovations and additions that are not visible from the outside. The business valuation process is far more sensitive and complex than just plugging numbers into a computer software package or spreadsheet, it requires material professional judgment.

8. How do you value a closely held business? (top)

There is no single method for determining the fair market value of a business or individual interests in its equity; the method depends upon the circumstances surrounding the business and its individual characteristics. Traditionally, the development of a fair market value opinion of a business enterprise and corresponding equity interest is based on the consideration of three basic approaches to value. Value indications derived through one or more of these approaches are then analyzed in order to formulate a single objective opinion:

• The Income Approach measures the value of a business based on the expected stream of monetary benefits attributable to the subject company. Generally, the present value of the income stream to be generated for the benefit of the shareholders over the business's remaining economic life is determined. This approach assumes that the income derived from the business will, to a large extent, control its value.
• The Market Approach arrives at an indication of value by comparing the company being appraised to comparable publicly traded companies or to comparable private companies, which have been recently acquired in arm's-length transactions. The market data is then adjusted for any significant differences, to the extent known, between the guideline companies and the company being valued.
• The Asset Based (or Cost) Approach is a general way of determining a value indication of a business's assets and/or equity interest using one or more methods is generally based on the value of the assets of the business, less liabilities.

9. What are some of the most common methods to value a business? (top)

Within the income, market and cost approaches are several methods, and within those methods are several procedures. The most commonly applied include:

• The Multiple Period Discounting Method within the Income Approach involves forecasting the future returns (e.g., net cash flow, net income, etc.) and discounting each back to a present value at a discount rate, which represents the time value of money plus risk. Two examples of procedures within this method are discounted cash flow ("DCF") and discounted future earnings ("DFE").
• The Single Period Capitalization Method within the Income Approach involves dividing a single historical or projected economic benefit by a capitalization rate that represents the discount rate for that variable less the expected sustainable long-term growth rate in that variable. An example of a procedure within this method is the capitalization of cash flows.
• The Guideline Publicly Traded Company Method (a/k/a the Market Multiple Method) within the Market Approach relates market value multiples for public company stocks to fundamental financial variables for the subject company (e.g., P/E, EBIT multiples, etc.).
• The Guideline Merger & Acquisition Method (a/k/a the Transaction Multiple Method) within the Market Approach relates value multiples from sales of entire companies or controlling interests to fundamental financial variables for the subject company (e.g., sales, EBITDA, EBIT and earnings multiples, etc.).
• The Direct Market Data Method within the Market Approach is a broader market based valuation method whereby all transactions for which market data is available are considered as a statistical ensemble that defines the market for businesses of the same general type (e.g., SIC category) as the target business.
• Prior Transactions within the Market Approach relate ways to reach value based on prior transactions in the subject company's stock to current data for the subject company.
• The Adjusted Net Asset Method within the Asset Based Approach involves individually adjusting all assets and liabilities (including those off balance sheet, intangibles, and contingencies) to current values and computing a resulting net asset value.
• The Excess Earnings Method , a hybrid between the Income and Asset Based Approaches, involves a collective valuation of all intangible assets as a group by capitalizing returns over and above a reasonable rate of return on tangible assets and adding the capitalized value of intangibles thus estimated to the value of tangible assets. It was originally created for valuing the intangible component of a business, not for valuing the company as a whole, and is not considered appropriate, according to the IRS, except if there is no better basis available for making the determination.

10. Why aren't you valuing my equipment and other fixed assets individually as part of valuing my business? (top)

A business is valued either on the basis of what it owns less what it owes, or on the basis of the benefits it generates. Assets are valued the same way. Your equipment is essential to generate the sales and profits an appraiser uses to value the business, and its value is included on that basis. Assets like extra cash, idle equipment, or a vacation condo that are not necessary to support operations and generate those benefits are added to the value.

11. What is 'fair market value" and how might it differ from what a buyer might pay for a business? (top)

Fair market value is typically defined based on the definition prescribed under Internal Revenue Service (IRS) Revenue Ruling 59-60, several other pronouncements, and a large body of case law as follows:

The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

In other words, in applying the standard of fair market value, we assume that:

• the equivalent of cash is being paid for the subject being appraised as of the Valuation Date;
• it refers to 'price' rather than the proceeds of the sale of a property;
• the company (interest) being valued has been placed on the open market for a reasonable amount of time - enough for all potential purchasers to be aware of its availability;
• the hypothetical buyer is prudent but without synergistic benefit (i.e., potentially very different from investment or strategic value) - as such, it reflects the consensus of rational pricing, rather than the highest price that might be obtained;
• a seller is not forced to sell (i.e., accept an offer that represents a "distress sale") and a buyer is not compelled to buy (i.e., necessary to earn a living); and
• the business will continue as a going concern and not be liquidated.

12. What is Revenue Ruling 59-60? (top)

Revenue Ruling 59-60 is an official pronouncement of the national office of the IRS, written in 1959, regarding the valuation of closely held common stock. It is the most widely referenced IRS revenue ruling in a business valuation context, and is also often referenced for non-tax valuations.

Within 59-60, the standard of fair market value is defined and the following eight basic factors to consider in a business valuation are outlined:

1. the nature of the business and the history of the enterprise from its inception;
2. the economic outlook in general and the condition and outlook of the specific industry in particular;
3. the book value of the stock and the financial condition of the business;
4. the earning capacity of the business;
5. the dividend-paying capacity of the company;
6. whether or not the business has goodwill or other intangible value;
7. prior sales of the stock and the size of the block to be valued; and
8. the market prices of stocks of corporations engaged in the same or a similar line of business as the subject company and whose stocks are actively traded in a free and open market, either on an exchange or over-the-counter.

13. Given the fact that I am obtaining an appraisal in connection with a litigation situation, will you be able to testify about your value conclusion? (top)

Yes. We have the specialized knowledge, skills, experience, training, and education to testify and assist the court in coming to a decision, and have been qualified as business valuation experts in court proceedings. It is important to note that even valuations in a non-litigation matter may end up in legal dispute.

14. Once I obtain a business valuation report, how long is it good for? (top)

A valuation is valid as long as its methodology is sound and its assumptions hold firm. It could be a day, a week, a month, a year, or any time period, depending on the facts and circumstances of the situation. As a practical matter, this extends to a maximum of a year (in more certain times), when an appraisal must be updated to reflect subsequent company performance and current economic/industry conditions. The old adage, "timing is everything," very much applies to business valuation. In the extreme case, given 9/11, in 2001, the valuation of a hotel or an airline company was significantly different on September 10th as compared to September 15th.

15. Is my company impacted by FASB's Statement of Financial Accounting Standards Nos. 141 and 142? (top)

If your financial statements are issued in accordance with Generally Accepted Accounting Principles ("GAAP"), if you have goodwill on your balance sheet, and/or you plan to make acquisitions in the future, the answer is "YES." These Statements require more explicit disclosure of the fair value of past and future acquisitions in relation to their actual cost. This means companies (both publicly and privately owned) will no longer have the option to leave overvalued goodwill assets on their balance sheets.

16. What size clients does SVG serve? (top)

Our clients range from small 'mom and pop' companies with $500,000 in revenues, to our typical middle market client companies with revenues in the $5 million to $100 million range. We can, however, value companies of virtually any size, in any industry.

17. Which industries does SVG serve? (top)

Strategic Valuation Group and its members have worked in many industries, including, but not limited to:

18. What are the different types of valuation reports available to a client? (top)

SVG can tailor the scope of its services, along with the scope of the report, to meet the client's needs and fee range.

First, let's address scope of SERVICES. In order for us to reach an opinion of value, we must perform a variety of complex steps. These include an analysis of the industry, obtaining a thorough understanding of the business and its financial statements, and using every appropriate method that exists to value the company. By performing all of these steps, we satisfy the requirements for delivering an APPRAISAL.

If we choose to omit certain steps from the analysis, then the scope of our services is reduced to something less than an appraisal, i.e., we are not as confident in our value indications. And depending on how many steps we don't perform, our comfort in the value indication can range from quite good, i.e. a "Limited Scope Appraisal," to very low i.e., a mere Calculation.

An example of a limited scope appraisal would include one in which all steps in the appraisal process were performed, with the exception of performing a detailed analysis of the industry. Contrast this with a calculation, where we would be requested to only analyze a subject's financial statements and utilize one, or a couple, valuation methods.

Now let's address SCOPE OF REPORTS. We can report our findings in a variety of reports. Say we perform an appraisal, but only the business owner and his team of advisors are going to use our findings. In that case, (because they already know the details of their industry and company) we can summarize what we have considered in a more succinct way. So rather than issuing a "formal appraisal report," (which details everything we considered along with our findings), we can issue a restricted use report. Because there is less time involved in writing the report, fees for a restricted use report are lower than a formal appraisal report.

Contrast this with an appraisal that will be submitted to a taxing authority (or Judge). In this case, we are required to submit a formal appraisal report so the user of the report can properly consider our process and findings.

A calculation report summarizes the specific steps that we were requested to perform. The report can range to a letter that briefly summarizes what we have done, with supporting schedules, to a more detailed report. Here, you tailor the report you want. Frequently, in litigation, we start off by performing calculations, and as the case progresses toward a trial, we formalize our findings and report them in a more thorough manner.

The following chart summarizes the scope of services and scope of reports...Click to view SVG SCOPE CHART