Who Needs a Business Valuation?

And Where Do You Find an Expert?

By Martin J. Lieberman

Published in NJ Business Solutions, October 2007

Moment-to-moment reports of sales of actively traded securities allow owners of such shares to value their interests contemporaneously. Owners of interests in closely-held businesses do not have this luxury. To find out what their businesses are worth, generally they have to hold their interests out for sale for a reasonable period of time and see what offers come. Alternatively, they can engage a business valuation expert to develop a value conclusion specifically for their business.

Of course, every industry has "rules of thumb" that provide a shortcut way of ascertaining value. Although easy to apply, such valuations are fraught with uncertainty as every business, even within the same industry and geographic region, has its own unique set of variables that affect value. Such rules of thumb are time-sensitive, shifting with changes in the business environment.

One might ask, "Why shouldn't I wait to value my business until I'm ready to sell or gift an interest to my heirs?"

The answer is that by valuing your business before you are ready to sell, you can identify value drivers and calibrate them to enhance the businesses' value so that when you actually do sell, it will be at a higher price.

A simple example is owners' discretionary payments. Assuming an owner pays himself a salary of $100,000 and that amount is the same as he would pay to a non-owner for the work he does, but he also pays himself a bonus of $200,000 reflecting a distribution of profits disguised as compensation (causing the net cash flow of the entity to go to zero), a valuation would entail adding back the disguised compensation amount. Thus, true cash flow of the business would be revealed, to which a multiple would be applied based on industry and specific company risk parameters arriving at value.

Other value enhancers might be acceleration of company receivable collections by offering customers discounts for prompt payment. The cost of such discounts could be weighed against the incrementto-entity value of the resulting enhanced cash flows.

Ideal circumstances for gifting shares of a business are when a business is worth less. No one is going to sabotage their business for the sake of a gift as that would be akin to shooting oneself in the foot. However, the value of a gift of a minority business interest would derive its value with respect not only to the business as a whole, but, more importantly, the value of the interest.

Determinants of such value are essentially the cash flow or lack thereof that would go to that interest, the inability of a holder to transfer that interest based on restrictions to such transfers and the inability of that interest to have input on decision making. Accordingly, gifting at a significant discount can be accomplished through a well-crafted shareholders' operating agreement, allowing majority shareholders to extract all of the cash flow, restricting transfers of interest and be nonvoting.

When a business has more than one owner, more often than not, buy-sell agreements become very important. Should a shareholder cease to live or be part of the business, a mechanism should be in place to buy out the departed owner. A buy out is predicated on value. Such value should be determined periodically so that when the circumstance arises, the remaining owners will be prepared to deal with it, such as with life insurance.

Where do you find an expert to value your business? Typically most people go to their CPAs. CPAs may or may not have the tools and experience to value your business.

There are CPAs who specialize in business valuations or have personnel in their firms whose practice is dedicated to business valuations.

There are also CPAs who are dabblers in the business valuation arena. Although they may mean well, beware; a little bit of knowledge can be a dangerous thing. There are also boutique firms whose only business is business valuation.

Martin J. Lieberman, ASA, a partner of Weiser LLP, possesses more than 30 years of experience providing accounting, tax, and business valuation services. For nearly a century, Weiser, with New Jersey offices in Edison, has provided accounting and consulting services to professional services groups, business enterprises and hig net-worth individuals.

Return to the Articles page.