Telephone: (540) 662-3417
Although “tax season” is long gone, friends and family look at me in disbelief when I mention how busy we are. “What could you possibly be busy doing this time of year?” they ask. Most people think that CPAs have a lot of down time after April 15, but, in fact, most of us do not. I, for instance, explain that I am busy with business valuations, and they all seem to have the same response – confusion and interest. Confusion- because they “kind of” know what a business valuation is, but aren’t quite sure. Interest- because a CPA who’s not doing tax, audit or financial statement work must be interesting. In this article, I would like to answer the most basic and frequently asked business valuation questions in an effort to dispel the confusion or the unknown.
What is a business valuation?
This is one of the most common questions our team receives. It is a business valuation (not “evaluation”). I like to explain a business valuation as an appraisal of stock or shares, or interests in companies that are not publicly traded—for small to medium-size businesses which is the size of so many of our clients. Sometimes we prepare valuations of 100% of an entity, and sometimes the valuation is for something less than 100%. The business entity types we value include partnerships, limited liability companies (LLCs), C Corporations, S Corporations and sole proprietorships. Sometimes the valuation is even for a fractional interest in real estate. It is important to add that we are not real estate or equipment appraisers.
Why do I need a business valuation?
We prepare business valuations for a variety of purposes. Estate and gift tax returns, which include gifting or transfers of business interests, generally require that a business valuation report is attached to the return. When business owners are purchasing or selling business interests (buying out a partner, for example), our services are requested. We help clients who are considering buying or selling an entire business. We have helped people who have received offers out of the blue to buy their business. We have helped clients with their decision whether to keep or sell certain lines of their business. We have also prepared business valuation reports for estates too small to file a return, but the executor wanted documentation as to the valuation of the business to document that an estate return was not needed. We’ve had individuals who inherited a business, and we helped them in their decision as to whether they wanted to keep or sell the business.
While we provide business valuation services for a wide range of purposes, sometimes we find that a business valuation is not needed. Being CPAs as well as credentialed business valuation specialists allows us to help clients and potential clients determine whether a business valuation is needed, and what level of service to provide. Sometimes a short consultation will suffice rather than a full blown detailed valuation report, depending on the circumstances. I remember one particular client who called for business valuation services, however the accounting services we were able to provide along with the valuation services were most valuable to the client. In that case, we prepared an illustration for the client showing him how the actual sales proceeds (the cash received for the business) would move through the entities (there was more than one business entity being sold).
So to make a long story short, a business valuation is something that we prepare when the need arises, and is not typically and annual procedure.
What makes a business valuable?
This question is the most important for business owners to know I think. Generally speaking, “valuable” businesses are profitable, have a past history of profitability (this shows stability), and have a future outlook of profitability. Cash flow is important, and when debt exists, it must be included in the equation. Of course businesses owning valuable assets also have worth.
What factors do you consider when preparing a valuation?
When we prepare a valuation, we consider both quantitative and qualitative characteristics of a business. As a simple example, let’s take a business which has consistently earned $1M of profits over the past 4 years, and our client wants to purchase it for $3M. My initial thought is “yes, go for it;” however, I force myself to keep my mouth shut until an analysis is done. What if we find out that this business has generated 90% of its business from one customer, and that customer has fallen upon some financial difficulty? –Glad I kept my mouth shut until more analysis was done.
Do all CPAs do business valuation work?
No. Business valuation work is a specialized area of practice, and our credentialing organizations require a significant amount of training, testing, experience, and annual professional education.
At Yount, Hyde & Barbour, we have a four-member team of seasoned valuation specialists. We are here to provide our clients (new or existing clients) with the level of services they need in order to accomplish their objective. We are experienced CPAs credentialed in business valuation through the AICPA (American Institute of Certified Public Accountants) as well as NACVA (National Association of Certified Valuation Analysts). When the need for valuation services arises, we would love to speak with you to see if we can help.