Buying or Selling a Business

Business Valuation is necessary to negotiate an acquisition or sale so that the interested parties can obtain the best fair market price. A closely-held business is often the centerpiece of the owner’s life’s work. As a seller, this makes for a very personal decision, not to mention a financially complex one. On the other hand, purchasing a business comes at a high cost and capital outlay to the buyer, so appropriately valuing the target company is critical to minimize the likelihood of overpayment. Whether you are the buyer or seller, it is essential to understand the valuation concepts that drive the ultimate purchase/sale price.

Bank and SBA financing

When negotiating with banks, venture capitalists, or other prospective investors, an objective valuation will help in raising capital. When a business valuation is required by the SBA, the business valuation must be prepared by a “qualified source.” A qualified source is an individual who regularly receives compensation for business valuations and is accredited. According to the SBA’s Standard Operating Procedures, an independent business valuation is required if:

  • The lender’s internal policies and procedures require an independent business valuation from a qualified source.
  • The amount being financed (including any 7(a), 504, seller, or other financings) minus the appraised value of the real estate and/or equipment is greater than $250,000.
  • There is a close relationship between the buyer and seller (for example, transactions between family members or business partners).

Estate, Gift and Income taxes

Family-controlled corporations and partnerships are frequently part of an estate plan to transfer wealth from one generation to another, particularly for closely held businesses gifted or bequeathed from owners to their children or grandchildren. Such entities are especially attractive because of the ability to employ discounts for lack of marketability or control in valuing the transfer for a gift, estate, or generation-skipping transfer tax purposes. The IRS requires that these services be performed by a qualified appraiser. These situations often receive special attention from the IRS and other state and federal regulatory agencies. Any discrepancy or undervaluing could result in severe tax penalties. For this reason, it is essential to have business assets and property held in an estate or gifted to an heir professionally valued by a qualified appraiser.

Partner Buy-out

When it comes to valuing a partner’s share of the business, the valuation of the company is the first step. The primary question is how to determine the business value among the partners.

If hypothetically, there are two partners, one owns 55% of the business, and the other owns 45%. Let’s say the company is worth $1,000,000. In the pro-rata allocation scenario, the first partner’s business ownership stake is worth $550,000, while the second partner has a claim of $450,000.

In reality, the first partner, who owns more than 50% of the company, has a controlling interest in the company and has a lot more say on how the critical decisions are made. As a result, such controlling business ownership interest comes at a premium, quite often a significant one.

There are three steps we will need to take to determine the value of a business ownership interest:

  • Determine the total business enterprise value.
  • Determine the pro-rata share based on the ownership split.
  • Apply the minority discount or premium to establish the worth of the partner’s business ownership interest.

Partnership Disputes

A business valuation is the process and procedures used to determine what a particular business is worth. Such a valuation can be used to determine the company’s worth as a whole and, consequently, the economic value of an owner’s separate interest in the business.

Partnership disputes involve determining the fair value of a company after the triggering of a dissolution or buy-out clause in shareholders or partnership agreement. Various federal and provincial business statutes also require a valuation be made as part of any proposed remedy to corporate oppression of minority shareholders.

ESOP Valuation

An ESOP is a type of employee benefit plan. ERISA and IRS specifically require the use of an independent appraiser for ESOP valuations. Determining a stock’s fair market value is critical in establishing and maintaining an Employee Stock Option Plan (ESOP). IRC Section 401(a)(28)(c) mandates the annual valuation of an ESOP by an independent business appraiser. ESOP valuation services generally fall into one of two areas: initial ESOP transaction valuation/consulting services and annual (or updated) valuation services. ESOPs also contain a “put option” enabling plan participants, retired participants, and beneficiaries to sell distributed ESOP shares back to the trustee at fair market value. The price at which this transaction occurs updates annually. An annual update becomes less time consuming and less costly than the initial valuation since our staff is familiar with the company and its financial data.

Divorce Settlment

When a divorce occurs, a fair market value of the business as well as division off assets and business interests is needed. When it comes to valuing a business, the business’ organizational structure is taken into consideration. This is because, by their very nature, some business structures may have their own institutional regulations that determine how they are valued and divided when it comes to a business founder or owner getting divorced. For example, in the case of a sole proprietorship, the business is divided exactly in half between the spouses. For limited liability companies, the valuation may be determined by the laws of the particular state where the company is registered. If the company is a corporation with shareholders who may receive dividends from the business, this will need to be taken into consideration upon the valuation of the business as well as the division thereof.

Startup Valuation

Business Valuation is never straightforward – for any company. For startups with little or no revenue or profits and less-than-certain futures, the job of assigning a valuation is particularly tricky. For mature, publicly listed businesses with steady revenues and earnings, typically, it’s a matter of valuing them as a multiple of their  (EBITDA) or based on other industry-specific multiples.

But it’s a lot harder to value a new venture that’s not publicly-listed and may be years away from sales. Startups, in the most general sense, are new business ventures started by an entrepreneur. The various methods through which the value of a startup is determined are Discounted Cash Flow,  Capitalization of Earnings, Scorecard Method, and Market Multiple Approach.

Pre-money Valuation

Pre-money valuation refers to the value of a company before it receives other investments, such as external funding or financing. Pre-money valuation is how much money it is worth before anything is invested into it. The term, which is also simply referred to as pre-money, is often used by venture capitalists and other investors who aren’t immediately involved in a company. This figure allows them to define what their share in the company is based on how much they invest. Pre-money is the valuation of a company before any rounds of financing and gives investors a picture of what the company’s current value may be. That’s because the valuation is determined before each round of financing, whether that’s private or public investment. You can also use the pre-money valuation prior to seed, angel, or venture funding is put into a company.

Fixed Fee

We provide our clients with peace of mind and financial certainty. What you see is what you pay. There are no hidden charges.

Fast Turnaround

Depending on the purpose of your valuation, it will take between two and three weeks for one of our analysts to complete the job.

Certification

Our analysts have earned the designations of Certified Valuation Analyst (CVA) – National Association of Certified Valuators and  Analysts (NACVA).

Customized Reports

Our reports will seamlessly guide you towards understanding how valuable your company is.