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Valuation Reports

Purpose of Valuation ReportValuation Reports

The purpose of a valuation report business is to establish a value for an entire or partial interest in a closely held business or professional practice, taking into account both quantitative and qualitative tangible and intangible factors associated with the specific business being valued.

Definition : The act or process of determining the value of a business, business ownership interest, security, or intangible asset (as defined in the International Glossary of Business Valuation Terms).

Business Valuations need to be performed by qualified and experienced valuation firm under the following conditions:

a)The firm represents itself to the public as an appraiser or performs appraisals on a regular basis
b)The appraiser is qualified to value the type of property
c)The appraiser is not a related party.

A Common Purpose of Valuation Reports is Expanded In The Following Paragraphs.

Business Valuations For Mergers and Acquisition

Whenever a company merges with another company, is acquired by another company, or sold, a valuation is necessary. In a merger situation, a professional may be asked to establish an “exchange value” of the companies involved. The valuator may be engaged to establish the value for either or both of the companies. Ina sale or divestiture of a company or of an interest in a company, the seller may engage a professional’s services to establish a range of values of the business that will assist the seller in negotiating a sales price. Conversely, a person or company may engage a professional to perform a valuation of a company they want to acquire. When businesses are acquired, they are often acquired for a flat or lump-sum amount. For accounting and tax reasons, the lump-sum purchase price must be allocated among the various classes of tangible and intangible assets of the business.

Purpose of a Valuation Report in Legal Support

For a variety of reasons, an attorney involved in a pending lawsuit might need to determine the value of a closely held business. The professional, as the expert, will be asked to give expert testimony regarding the conclusions. The need for litigation support relative to business valuations can arise in divorces, partner disputes, dissenting shareholder actions, insurance claims or wrongful death and injury cases.

Business Valuations For Regulatory Matters – FAS 141 and 142

The FASB now requires that independent business valuations be made to establish the purchase value of all intangibles included in a business combination. Similarly, FAS 142 requires an annual review of the values of intangible assets in order to measure whether or not any impairment of the original or carrying value has occurred. Under Sarbanes-Oxley, an independent auditor is explicitly forbidden to provide “appraisal or valuation services, fairness opinions, or contribution-in-kind reports” for any of its audit clients.

Purpose of a Valuation for Buy- Sell Agreements

All closely held businesses should adopt a buy-sell agreement among the partners or shareholders. Much protracted litigation could be avoided if, in the beginning, the business owners would address the issue of a buy-sell agreement in their partnership or shareholders agreements. A buy-sell agreement is an agreement that establishes the methodology to be followed by the parties regarding the ultimate disposition of a departing or a deceased owner’s interest in a closely held business. The process of determining the value of the business is directed by the buy-sell agreement and there are many alternative procedures for doing so. Some buy-sell agreements provide for the determination of value merely by agreeing to a value at the beginning of each year. Some agreements are based on a predetermined or prescribed formula, whereas other agreements require that an independent business valuation is performed periodically. Regardless of the alternative selected by the owners, a professional may be asked to assist in the business valuation process.

There are two basic types of buy-sell agreements: the stock-repurchase and cross-purchase agreements. Under a stock-repurchase agreement, the company agrees to purchase the interest of a departing owner. A cross-purchase agreement allows the remaining owners to purchase the departing owner’s stock.

An appropriately constructed buy-sell agreement will address several important items, including:

What events (e.g. death, disability, etc.) trigger the buyout?
How will the buyout be funded: insurance, financing, or something else?
How soon will the buyout occur, in 30 days, 60 days, or longer?
How is the interest to be valued, i.e., based on a fixed value, formula, or a valuation?

When preparing a business valuation report, one should always review the existing buy-sell agreements for restrictions, valuation methodology, terms of purchases, etc.

Purpose of a Valuation Report for Estate, Gift and Income Taxes

In many cases, the value of an interest in a closely held business is an individual’s primary asset. The value of the closely held business must be ascertained to adequately perform a thorough and comprehensive estate or financial plan. It may also be necessary to establish the value of an interest in a closely held business to properly prepare estate or gift tax returns and to establish the basis of inherited stock in the hands of an heir to an estate.

Age demographics, as previously stated, will involve parents wanting to retire who will have to properly deal with the value that has accumulated in their closely held businesses. There are various ways a business owner can transfer the value that has accumulated in a closely held business. These include giving •the business to the heirs, selling the business to the heirs or to third parties, or giving the business to a charity. Regardless of how the business is transferred, an independent business valuation of the business interest is imperative.

If parents die before making transfer arrangements for the business, the value will have to be established for reporting on an estate tax return.

The universal standard of value for a gift, estate, and inheritance taxes is “fair market value.” Fair Market Value is defined in Revenue Ruling 59-60 as.” the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a reasonable knowledge of relevant facts.”

Revenue Ruling 59-60 also outlines a number of valuation methods and techniques which have become generally accepted and which must be considered in each case. However, as previously mentioned, valuation is as much an art as a science. The final determination of value under the regulatory standard will depend upon the facts and circumstances of the particular valuation.

Purpose of Valuation Reports for Employee Stock Ownership Plans (ESOPS)

An ESOP is a type of employee benefit plan. It is considered a defined contribution plan and is intended to invest primarily in the employer’s stock. The ESOP is a mechanism by which employees become beneficial owners of stock in their company. Generally, any non-publicly traded company with an ESOP must obtain a valuation of its stock on an annual basis. One significant advantage of an ESOP is that shareholders of a closely-held corporation can defer taxation on the gain resulting from their sale of company stock to an ESOP, provided the ESOP owns 30% or more of a company’s shares after the sale. In order to defer the gain, the seller must reinvest sale proceeds in qualified replacement property (QRP) consisting of stock or bonds in operating companies in the US.

To learn more about small business valuation reports, contact American Business Valuation Services at 502-244-0480 ext. 24;


Business Valuation Companies

Business Valuation Companies! Traditionally, the common choice of a professional to evaluate a business’s worth was an accountant, an accounting firm, or other financial professionals. It seems reasonable to use an accountant because they are experienced in evaluating financial reporting, categorizing values, and reporting financial standings. In fact, at one time when there was no such thing as Business Valuation Companies, accountants were probably the best choice for the job of having a business valuation performed. Bank officers who issue a credit to businesses might also seem like a reasonable choice for generating a Business Valuation report because they are experienced in calculating the collateral value, business plan viability and risk factors. Investment Bankers might seem like another good choice because their profession rests on their daily efforts to make educated and calculated estimates about the current business worth and future returns and growth potential of a range of businesses. However, as with most things, there are now more types of specialized financial and business professionals to choose from, and more factors for each type of professional to know about, so it can be very advantageous to select the right professional for the job. As businesses and wealth strategies have become more varied and more complex, there have emerged several growing financial specializations—the most relevant of which are Business Valuation Companies, Business Valuation Professionals, Merger and Acquisition Companies and Advisers, Consulting Firms and Investment Bankers.

Much Value for the Price

An accurate and defensible Business Valuation report is a crucial document, but commissioning one from an accounting firm is likely to cost more money than necessary in more ways than one. Accountants charge for their financial, accounting and tax expertise, as well as general overhead costs to develop a valuation. However, accountants are typically not experienced in using the Uniform Standards of Professional Appraisal Practice authorized by the U.S. Congress as the source of appraisal standards and appraiser qualifications. Their strengths in financials are often not sufficient to make up for their lack of experience with standard appraisal practices. It is not uncommon for businesses to be either grossly overvalued or undervalued. The world of M&A is replete with horror stories of firms changing hands only for a former owner to learn that they could have received much more for their business had they hired a firm experienced in producing Business Valuations. This type of story is often heard in buyouts, divorce, estate planning and on and on. A Business Valuation created by someone who is not an expert in Business Valuations can be a painfully expensive one.

Business Valuation Companies

Business Valuation Companies, Business Valuation Professionals, and M&A Companies on the other hand, don’t need to be educated on the financial statements. Since Business Valuation Firms and M&A Companies are instead thoroughly knowledgeable on the uniform appraisal practices, Business Valuation Services are part of their daily activities, and they are experienced in understanding all the factors which play into the value of a business, as a result they are able to create a more reliable and accurate Business Valuation for a lower fee than many accountants could do. Additionally, an M&A Company experienced in researching, financial reporting, presenting, and closing deals can apply these real market experiences to produce more accurate and defensible Business Valuation reports.

Another reason not to rely on your own accountant or other familiar professional is that for a Business Valuation to be perceived as reliable, it needs to be objective. A good M&A Company that is well versed in the details and the strategies of business Exit Planning, Business Valuation, and business sale issues, will be able to look at the entirety of your business very knowledgeable but without the influence and bias to your company.

Things To Know When Commissioning a Business Valuation Report

The value of the shares of a corporation can be affected by many factors, including whether the business is closely held, owned by a large group of shareholders, or is publicly traded. It’s important to understand that when evaluating a portion of a business, there are at least three levels of potential value for any given amount of stock:

1. The value of the entire company is directly relevant to stock that has Controlling Interest because the holders thereof can do as they wish with the company.
2. Market trends affect shares that represent Marketable Minority Interest because they can be freely bought and sold among investors.
3. The only monetary value to Non marketable Minority Interest Stock is their potential for dividend pay off, or for sale back to the company at some point.

Business Valuation is not an exact science. Opinions play into it. Don’t expect an exact Valuation figure just by using one valuation method. To obtain a more precise and correct value for any given business; the evaluator will utilize at least three different valuation methods and will utilize a weighted average of all methods to arrive with a more reliable indication of business value. As compared with an accountant or other professional who only performs a few Business Valuations occasionally, a business valuation companies specialize in Business Valuation Services and routinely performs them, will have a better feel for how the market in general as well as specific buyers will pay for certain expected rates of returns in a open market.

Qualified Business Valuation Companies can provide a sound business value to hold up to more than just the scrutiny of potential buyers but also their advisers. Buyers will put more stock in the opinion of an experienced evaluator whose previous valuations proved out to be fairly accurate in the long run. But even more important can be how well a business valuation will hold up if ever challenged in court, should there arise a dispute over the true value for tax purposes or concerning a buyer was fraudulently mislead.

Qualifications of Business Valuation Companies

Be sure to consider the credibility of the person or company who generated, or will generate, the Business Valuation report from a list of top valuation companies.  Here are some of the types of relevant credentials, along with a summary of the requirements to obtain them:

• Accredited Senior Appraiser (ASA), granted by the American Society of Appraisers (ASA). An important note: ASA members may be appraisers in any of numerous fields, not just business valuation. Requirements:

o Five years of full-time appraisal experience,
o Four-year college degree,
o Successfully pass four “Principles of Valuation” courses,
o Pass an ethics exam,
o Submit an appraisal report for evaluation.

Accredited in Business Valuation (ABV), granted by the American Institute of Certified Public Accountants (AICPA). Requirements:

o Have a valid state-issued CPA license,
o Pass an ABV Examination,
o Attest to having completed a minimum of either six business valuation engagements OR obtained 150 hours of business valuation experience,
o Complete 75 hours of valuation-related continuing professional education.

Certified Business Appraiser (CBA), granted by the Institute of Business Appraisers (IBA). Requirements:

o Four-year college degree,
o IBA membership,
o Successfully complete Business Valuation & Certification Training Center,
o Pass a five-hour exam,
o Successfully complete an IBA workshop,
o Submit two demonstration reports.

• Certified Valuation Analyst (CVA), granted by the National Association of Certified Valuation Analysts (NACVA). Requirements:

o Be a Practitioner member in good standing with NACVA,
o Submit a sample Case Study or an actual sanitized Fair Market Value (FMV) report,
o Pass a comprehensive five-hour multiple-choice proctored examination,
o Either hold a state-issued CPA license or hold a business degree from an accredited college and be able to demonstrate “substantial experience” in business valuation.

Chartered Financial Analyst (CFA), granted by the CFA Institute. Requirement:

o Pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct,
o Complete the CFA Program,
o Have four years of qualified investment work experience,
o Become a regular member of CFA Institute and apply for membership in a local CFA member society.

Fairness Opinion

Another service which can be performed by business valuation companies specializing in Valuations is producing a Fairness Opinion, which is a definitive “yes or no” finding on whether a particular business sale, purchase, or merger transaction is either fair or unfair from a financial point of view. Obtaining a Fairness Opinion can guide Boards of Directors as well as be used as legal evidence helping to protect them from stockholders who might otherwise charge Directors with negligence. It can also protect against hard feelings if the business transfer is between friends or family. To avoid conflict of interest problems, you would want one firm to provide your Fairness Opinion and a different firm to handle the actual preparation and sale of the business. However, a single Company could properly provide all of the following services without conflict of interest: a good and defensible Business Valuation, Exit Planning Advice, financial reporting, financial research and presentation preparation, and representation in the sale or merger, deal structuring and closure process.

In order to get the most experienced Business Valuation Companies in combination with the best fee rate, choose a firm who typically handles businesses of the size in question. If the firm typically works on deals larger than yours, you might be paying top dollar for work done by a junior employee; if the firm is not used to valuing deals as large as yours, they may not be knowledgeable enough to give an accurate and reliable valuation opinion.

Remember, that while Business Valuation Companies are usually more informed and experienced in producing reliable valuation reports than accountants and other financial specialists, there are even greater potential advantages to choosing an M&A Company which is able to offer a complete array of services including Advisory, Exit Planning and Business Valuation. An M&A Company who chooses to become expert in all of those areas, and who performs them on a regular basis, has a broader range of experience and expertise to apply to the job of putting all the right pieces together into a reasonably accurate, reliable, and defensible report at the best possible price.