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MY BUSINESS IS WORTH WHAT?. UT Center for Family and Privately-Held Business Mini-Forum 5/18/10. J. Stephen Schult, CPA Gilmore, Jasion & Mahler, Ltd. 1715 Indian Wood Circle, Suite 100 Maumee, Ohio 43537 419.794.2000 sschult@gjmltd.com.
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MY BUSINESS ISWORTH WHAT? UT Center for Family and Privately-Held BusinessMini-Forum5/18/10 J. Stephen Schult, CPAGilmore, Jasion & Mahler, Ltd.1715 Indian Wood Circle, Suite 100Maumee, Ohio 43537419.794.2000sschult@gjmltd.com Jeffrey S. Denning, CPA/ABV/CFFGilmore, Jasion & Mahler, Ltd.1715 Indian Wood Circle, Suite 100Maumee, Ohio 43537419.794.2000jdenning@gjmltd.com Dale J. Seymour, MSM, CLUChFC, CFBS, AEP, LUTCFSeymour & Associates1760 Manley RoadMaumee, Ohio 43537419.893.9759dseymour@finsvcs.com
Agenda • General Valuation Discussion • Steve & Attendees • Reasons for Valuations / Practical Issues • Dale & Attendees • Valuation Process / Considerations • Jeff & Attendees • Questions • All Presenters and Attendees
Home Analogy • What is the value of your 3,500 sq/ft home? Versus another 3,500 sq/ft home? • Sentimental value to you? • Agent will look at “comparable sales” • Is neighborhood deteriorating or a hot area? • Has the home been properly maintained? • Value – What a willing buyer / willing seller agree on
Reasons for Business Valuations • Selling your business / Buying a business • Estate Tax / Life Insurance Planning • Gifting of Stock • Buy-Sell Agreements • Divorce / Litigation
Common Reasons for Business Valuations • Selling Your Business • Owners have unrealistic expectations of the value • If you had a range of value, how would you use that information? Plans? Goals? • What are you doing to get your business ready for sale? 2. Estate Tax/Life Insurance Planning • Closely-held business may be largest part of an estate • How do you feel about it being so much of your net worth? • What are your retirement or exit plans? • Estate taxes could force the sale of the business 3. Gifting of Stock • Qualified appraisal required with gift tax return
Common Reasons for Business Valuations …continued • Buy-sell Agreements • Good buy-sell agreements (BSA’s) can help prevent future problems/issues • If you have a BSA, does it call for a valuation? • Divorce/Litigation • There tend to be large differences of opinion between experts regarding value of a business • Financing (e.g., SBA loan)
What is a business valuation? • The act or process of determining the value of a business enterprise or ownership interest therein. • Valuing a bundle of rights. • Rights to part of future stream of earnings; • Rights to sell business, if controlling; • Rights to sell or transfer fractional interest.
What is a business valuation? (cont.) • There are several organizations that have different valuation standards. A valuation report should clearly state which standards were followed. The various standards are similar. • Valuations also normally comply with various revenue rulings, including Rev. Rul. 59-60, which outline the approaches, methods and factors to be considered in valuing shares of capital stock in closely held entities for tax purposes. It is relevant for non-tax purposes too.
Business Valuation Considerations • Client and intended users • Purpose of valuation • Type of entity and interest to be valued • Valuation date • Standard of value • Premise of value • Level of value • Scope of work • Assumptions or hypothetical conditions
Business Valuation Considerations (cont.) The proceduresemployed in valuing a business normally include such steps considered necessary, including (but not limited to): • An analysis of financial statements • An analysis of management’s expectations and other information supplied by management • Discussions with management • A visit by one of the appraisers to the Company’s location(s) • An analysis of the industry • An analysis of the general economic environment as of the valuation date, including investor’s equity risk and return expectations. • An analysis of applicable discounts and premiums of value • An analysis of other pertinent facts and data resulting in a conclusion of value.
Business Valuation ApproachesThree basic approaches and two methods under each approach: • Income • Market • Asset (a/k/a “cost approach”)
Analyze the Company’s Financial Information • Cashflowanalysisiskey • Enterprise’s cash flow; or • Cash flow to minority owner • Normalizing adjustments • Addback owner’s compensation and perks • Rent if above market rate
Other Information • Site visit, interviews • Industry research – market & customers • Guideline public companies • Comparable transactions • Consolidators
Other Information(cont.) • Private equity groups • Economic outlook • Competitive analysis • Assess strengths and weaknesses (SWOT) • Identify value drivers
Income Approach • Most appropriate for businesses anticipating future earnings • Cap of cash flows method, or • DCF (discounted cash flow) method • Historical results analyzed & adjusted to help estimate future cash flow • Investors buy tomorrow’s cash flow • Cap rate or multiple
Market Approach • Market approach appropriate for all types if comparable and sufficiently similar in purpose and circumstance • Apply guideline company multiples (adjusted) to subject cash flows, or • Comparable deals, or • Bona fide offers, or • Past transactions in subject’s stock
Asset Approach Most appropriate for: • Asset holding companies • Real estate entities • Marginally profitable businesses • Purchase accounting
Apply Discounts or Premiums • Lack of control • Lack of marketability • Lack of liquidity (controlling) • Depends on method used to arrive at value • Key person discount
Deliverables • Help client understand range of value and drivers • Levels of service • Types of reports • Oral Report • Testimony