Private company appraisals are often derived from public stock data, because it’s more relevant and plentiful. But private and public companies can markedly differ in terms of risk, expected return and liquidity. Appraisals that fail to account for these differences could be making “apples-to-oranges” comparisons. This article lists some of these key differences between private and public companies.
The loss of a “key person” from a business could disrupt day-to-day operations, alarm customers, lenders and suppliers, and drain working capital reserves. But how do valuators quantify the value of key people? This article looks at the factors they consider when evaluating a key person discount and how they judge the ability of others to take over a key person’s responsibilities and relationships. It also discusses the three valuation methods they generally choose from.
Critics of the excess earnings method call it subjective, ambiguous and outdated. Yet the method remains a viable tool, especially when valuing small professional practices for divorce purposes. Because of its perceived simplicity, the excess earnings method can also serve as a meaningful sanity check for other methods. This article explains how it works.
Not every financial professional is qualified to value a business — especially if a third party will rely upon the appraisal. Earning a valuation credential requires specific coursework, testing, peer review and other prerequisites. This article helps business owners and attorneys sort through the various valuation credentials by summarizing the requirements of the most common business valuation designations.
In answering the question of what a business is truly worth, an appraiser considers many aspects of its operations, from management, to products and services, to the health of its industry. He or she also looks beyond the balance sheet, seeking any hidden assets or liabilities that may affect value. An appraiser analyzes several areas, including uncollectible receivables, inventories and fixed assets, in determining the appropriate adjustments.
Even the most successful businesses may run into roadblocks when struck by unexpected events, such as death, disability or divorce. A well-reasoned buy-sell agreement can help businesses maintain control and ensure orderly ownership transfers. This article discusses the ins and outs of buy-sell agreements, noting the importance of obtaining an independent appraisal and the need to define key terms such as the standard of value and the valuation date. All of these factors combine to generate a valuation that is objective, independent and fair.
When shareholders disagree — for example, when minority shareholders oppose a major corporate decision or a controlling owner is accused of wasting corporate assets — the owners may need an appraisal to equitably part ways. But before valuing a privately held minority interest, an appraiser has to address several issues, such as the appropriate standard of value, valuation discounts and adjustments, and the effective appraisal date. This article uses a hypothetical example to highlight these issues, showing how appraisers bring their experience and expertise to bear and help shareholders reach a fair settlement.
Private business appraisal must be based on information available at the required date of appraisal, according to Revenue Ruling 59-60. Business valuation experts generally consider only information that is “known or knowable” on the valuation date. But there are exceptions to this rule. In a recent case, Estate of Jung v. Commissioner, the U.S. Tax Court made an important distinction between subsequent events that affect fair market value and those that provide an indication of value. This brief article explains this distinction and under what circumstances business valuation experts may be able to use subsequent events in their analyses.
Estate of Jung v. Commissioner, 101 T.C. 312, 1993
Many business managers use strengths, weaknesses, opportunities and threats (SWOT) analysis to frame their strategic planning. Valuators may also use it to help evaluate a company’s performance — as well as its future prospects. This article discusses the various steps in SWOT analysis and how each area affects the company’s value. The article explains the role of a valuator in helping to evaluate subjective assessments concerning a business’s strengths, weaknesses, risk — and return.
Buy-sell agreements act as a form of insurance to protect companies during significant ownership changes, whether foreseen or unforeseen. A good agreement’s buyout terms and provisions can ensure the company remains stable and solvent through upheaval. This article notes the importance of periodic updates and discusses the elements of a well-reasoned, supportable buy-sell agreement. The article points out how an experienced valuator can help ensure the agreement is fair to all shareholders.