VALUATIONS 101
What is a Business Valuation?
A biomes valuation is the process of determining the fair market value of a business. It involves a thorough analysis of the company's financial and operational performance, including its assets, liabilities, revenue, and profitability. Business valuations are typically conducted for a variety of reasons, including mergers and acquisitions, business sale or purchase, estate planning, and financial reporting. A comprehensive business valuation provides critical information that helps business owners make informed decisions about the future of their company. It also provides an objective and independent assessment of the business's worth, which can be important in attracting investors or buyers.
A business valuation report issued by a firm with certified appraisers holds credibility. Our valuation experts are certified by the National Association of Certified Valuators and Analysts (NACVA) - the most recognized and esteemed organization in the valuation industry.
When Do You Need a Certified Business Valuation?
There are several situations in which a business valuation may be necessary. For example, if you're planning to sell your business, a business valuation can help you determine a fair asking price that will attract serious buyers. Similarly, if you're considering buying a business, a valuation can help you determine if the asking price is reasonable and if the business is worth investing in. Business valuations are also important for estate planning purposes, as they can help ensure that your business is properly valued and included in your estate plan. Additionally, if you're considering taking out a loan or seeking investors, a business valuation can help you demonstrate the value of your business and its potential for growth.
Ultimately, a business valuation is an important tool that can provide critical information to help you make informed decisions about the future of your company.
Will My Information Be Secure?
We take the security and confidentiality of your sensitive information very serious. When you become a new client, you will gain access to our secure portal by registering with us. Our portal provides a safe and convenient platform to share information with us and receive your completed valuation report. We know the importance of safeguarding your information, which is why we prioritize secure portal communication over unsecured email. As a returning client, you can simply log in at any time to update your information, and we'll notify you via email as soon as your valuation report is ready for download. Our efficient and secure process ensures that your information is always in safe hands, giving you peace of mind.
What is a "certified" business valuation report?
As a potential consumer of a business valuation, you need to know that not all business valuations are equally reliable. A "certified" business valuation adheres to professional valuation standards, conducted or reviewed by a business valuator who is certified by a professional, accredited organization, such as the National Association of Certified Valuators and Analysts (NACVA). There are individuals and firms offering business valuations (written or oral) that do not follow professional valuation standards and are not conducted by a business valuator, raising questions or reliability and increased financial risk for your business.
Find a Report That is Right for Your Business.
Why is it important to obtain a certain business valuation report?
A business valuation report issued by a firm with certified valuators holds credibility. Whether you are a business owner contemplating the sale of your business, a banker needing a detailed report for an SBA-backed loan or a lawyer needing an expert for a legal case - you will want to obtain a valuation report that is credible and protects you against others from discrediting the valuation.
A business valuation report issued by uncertified valuator exposes you to unnecessary risks - you want to avoid leaving money on the table during the sale of your business, you bank from failing an SBA audit or losing a legal dispute on behalf of your client.
A business valuation report from a firm that adheres to professional business valuation standards and who employs certified, highly educated business valuators will help protect you against these unnecessary risks.
What are the risks of not using a "certified" business valuation?
There are several risks you can avoid by engaging a reputable firm that employs certified valuators.
Prevent the needless loss of money by not fully understanding the value of your business. A valuation from a credible firm with certfiied valuators will consider multiple valuation methods based on the reason for the valuation and facts of the business and industy. this arms you with the knowledge needed to make informed decisions that prevent unnecessary money left on the table.
Stop the loss of time when selling your business or raising capital. Time value of money is a well-known financial concept that a dollar today is wroth more than a dollar tomorrow due ot inflation or its buying capacity. You could materially delay the sale of your business if you have an uncreditable valuation that iscalled into question, or if the business is overvalued, you could "sit" on the sale until it is re-priced.
Avoid the risk of sitting through a negotiation where the counterparty pokes holes in the valuation. You can quickly lose credibility during valuaiton. A valuation firm adhering to professional standards will produce a report that will explain (in plain language) how the business was valued and identify the key value drivers and steps in the process.
Destroyed confidence during a transaction/event can undermine your goal of optimizing value. It's not uncommon for owners to delay decisions and accept less money when they're not confident or understand the valuation in-hand.
If you are a banker, CPA, lawyer, business broker, or financial planner, help mitigate the risk of the following situations by engaging with a reputable firm that provides certified valuation experts.
- Failed audits
- Lost IRS claims
- Lost legal claims and cases
- Lost profit
- Unapproved loans
- Challenged purchase price allocations
- Delayed sales
- Lost Customers
What's included in a certified business valuation report?
A detailed business valuation report (written or oral) that adheres to NACVA standard must be coherent, supportable, and understandable. Many reports can fall short or valuation professional standards or if they adhere to standards, the reports are overly technical and hard to read. Badger Business valuation reports are easy to read and understandable. We've gone to great lengths to ensure our reports can be read by business owners as well as by financial and legal professionals without sacrificing quality or adherence to professional valuation standards.
Valuation reports from uncertified individuals and firms not adhering to professional valuation standards typically overemphasize financial ratios and market-based valuation approaches. Som of these reports are very flashy and profesional-looking, back lack basic analysis and support for the valuations.
A detailed report that adheres to professional valuation standards should include the following sections titled using wording similar in content to that shown below:
- Letter of transmittal
- Table of Contents
- Introduction, may include:
- Identification of the subject being valued
- Purpose and use of the valuation
- Description of the interest being valued
- Ownership size, nature, restrictions and agreements
- Valuation date
- Report date
- Standard of Value and its definition
- identification of the premise of value
- Scope limitations
- Material matters considered
- Hypothetical conditions/assumptions and the reason for their inclusion
- Disclosure of subsequent events considered
- Reliance on a specialist
- Denial of access to essential data
- Jurisdictional exceptions and requirements
- Sources of information
- A description of the fundamental analysis, may include:
- Historical financial statement summaries
- Adjustments to historical financial statements
- Adjusted financial statement summaries
- Projected/forecasted financial statements including the underlying assumptions
- Non-operating assets and liabilities
- Valuation approaches and method(s) considered by the valuator
- Valuation approaches and method(s) utilized by the valuator
- Other items that influence the valuation
- Site visit disclosure
- Reconciliation of estimates and conclusion of value
- Identification of the assumptions and limiting conditions
- Representation of the valuator, may include:
- Client identification and limitiations on use of report
- Disclosure of any contingency fee
- A statement of financial interest
- Whether or not valuator is obligated to update the report
- Responsible valuator signature - the valuator who has primary responsibility for the determination of value must sign or be identified in the report.
- Qualifications of valuator
- Appendices and exhibits
A summary report is an abridged version of the information that would be provided in a detailed report (as outlined above).
Should I use my CPA to certify the value of my business?
It makes logical sense to consider engaging your local CPA to conduct your business valuation since s/he already has access to your financial statements and tax returns. However, if your CPA is not a certified business valuator, then the valuation report will not be as credible and hold the same weight with third-parties, exposing you to unnecessary risks. You want to weigh the pros and cons of working with a local CPA who may only conduct a few valuations per year, if any. These individuals may not be up to speed on changes in professional valuation standards, knowledgeable of applicable case rulings or have access to the same transactional databases as a firm who exclusively focuses on business valuations.
What are some reasons why certified business valuations are needed?
There are many reasons why you may need a business valuation. If you’re a business owner, you may need a business valuation to support a full or partial sale of your business, a buy/sell agreement with a business partner or a potential capital infusion. If you’re a CPA, you may need a business valuation of your client’s business to support a purchase price allocation. If you are an insurer, it’s commonplace that you may need a loss/profit calculation for a claim. Certified financial planners and lawyers also routinely need business valuations to support client work. Below is a list of some common reasons why business valuations are needed by our clients:
- Mergers and acquisitions
- Sales and divestitures
- Buy/sell agreements
- Banks - loan applications
- Business planning
- Retirement planning
- Fairness opinions
- Share redemptions
- Shareholder transactions
- Capital infusions
- Expert testimony/litigation support
- Estate planning and taxation
- Gift taxes
- Purchase price allocations
- GAAP valuations
- Employee stock ownership plans (ESOPs)
- Employee benefit plans
- Solvency opinions
- Insolvency opinions
- Collateral valuations
- Charitable contributions
- Determination of net operating loss in bankruptcy
- Determination of of liquidation value in bankruptcy
- S Corporation Elections - calculation of built-in gain per asset
- Marital dissolutions
What are the different valuation methods.
There are several commonly used methods of valuation. The applicability of a particular method is based on the circumstances involved in each individual case. The certified business valuator is responsible for selecting the most appropriate method(s) based on his or her knowledge of the details of each case. The IRS has provided guidance on a number of valuation methods and techniques which have become generally accepted and which must be considered in each tax-related valuation case.
Does the reason for a business valuation affect the certified valuator's conclusion of value?
Yes, the value of a business can be different because of the reason for the certified valuation.
Some of you may know about or have heard the terms ‘Fair Market Value’ or ‘Strategic Value’ in the past. If you haven’t, don’t worry – we will introduce them. In valuation, these terms are called ‘standards of value’ – which can affect the value of a business. The three standards of value are:
- Fair Market Value (FMV)
- Fair Value (FV)
- Strategic/Investment Value (IV)
The standard of value chosen for your business valuation will be based on the reason for the business valuation. For example, if you are a business owner contemplating a partial-interest sale of your business, Fair Market Value will be the standard of value chosen for your valuation. If you are involved in a legal dispute or marital dissolution, the likely standard of value chosen will be Fair Value. However, if you are looking to purchase a specific company, the standard of value chosen may be Investment Value.
So the reason for your business valuation will determine the standard of value chosen. The same business could potentially have three different values depending on the reason of the valuation and the selected standard of value.
Below is a further explanation of each standard of value for those of you who want to know a little more about when each standard of value may be chosen.
Fair Market Value (FMV) is the most widely recognized and accepted standard of value in the U.S. It is the standard used in all Federal tax matters, whether it is gift taxes, estate taxes, income taxes or inheritance taxes.
Fair Value (FV) can have several meanings, depending on the purpose of the valuation. In most states, fair value is the statutory standard of value applicable in cases of dissenting stockholders’ valuation rights. In these states, if a corporation merges, sells out, or takes certain other major actions, and the owner of a minority interest believes that s/he is being forced to receive less than adequate consideration for a stock, s/he has the right to have a shares appraised and to receive fair value in cash. FV is also the standard of value used by the Financial Accounting Standards Board (FASB) and its pronouncements pertaining to business valuation. FV may also relate to value in a marital dissolution case. Many states have specific definitions of fair value with regard to divorces.
Investment Value (IV) is the value of a specific subject business/interest to a particular investor based on individual investment requirements and expectations. IV is the standard of value used when a client is actively considering the purchase of a specific business/interest and they want to value potential benefits, including shared services, infrastructure, etc.
