Prepare for valuation issues in your buy-sell agreement

Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play. Issues, what issues?

Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute. The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible.

A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably. Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve. What are our protocols?

At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:

  • How “value” will be defined.
  • Who will value the business?
  • Whether valuation discounts will apply.
  • Who will pay appraisal fees?
  • What the timeline will be for the valuation process.

It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical. Are we ready? Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong.  Additionally, once the appropriate documents are put in place, business owners may have a tendency to put it in a drawer out of sight. The agreement should be considered a “living document” and the valuation formulas should be tested periodically to make sure that the original criteria are still a good basis for the agreement. It is much easier to discuss the issues when it is an exercise and not an actual triggering event.

So try and be prepared for the unexpected, the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components (and some occasional testing) the easier it will be to resolve issues when they arise.

The Importance of a Current Business Valuation

by: Lisa Matuszny, CPA and Lawrence DeBaltzo, CPA, CGMA, CVA

The American Society of Appraisers (ASA), among the founding members of the field of business valuation, recommends that every company, whether publicly traded or not, have a current business valuation.

In fact, in an article from iPFrontline in November 2015, Bruce Bingham, ASA, senior managing director with Trenwith Valuation LLC in New York says that “Every CEO or President of a company should have a current business valuation in his or her desk drawer. It is the only way to make informed decisions about the direction your company should take.”

The benefits of getting a current and accurate valuation of your business are many and include; knowing what your business is worth, understanding where your business fits within your industry, getting a pulse on your financial condition and being able to quickly take advantage of acquisitions, sales, capital investment or mergers.

The need for business valuations has increased recently and we wanted to spend time diving deeper into this topic with two of our Partners, Lisa Matuszny, CPA, and Lawrence DeBaltzo, CPA, CGMA, CVA, who are heavily focused on helping our clients determine the right valuations for their businesses.

Lisa and Lawrence, what are the most common reasons clients are asking you for business valuations?

We are seeing clients coming in for current business valuations for the following reasons:

  • Sale or purchase of an existing business
  • To value a business in the case of divorce
  • Shareholder issues (including entry/exit of owners and buy-sell agreements)
  • Gifting and Estate issues

So, I am thinking about buying a business.  What are the important questions I need to ask or areas I need to consider?

When clients come to us indicating their interest in buying an existing business, we try to learn more about their intentions by asking the following qualification questions:

  • Are you looking to become involved in a particular industry?
  • Are there industry barriers or certifications needed?
  • Do you have any experience in that industry?
  • Are there funds available or the availability to borrow to finance a deal?
  • Are you looking for a job or an investment?
  • Do you have an appropriate group of trusted advisors to assist in the transaction?

Why is a current valuation important when buying a business?

Our biggest reason for pushing towards a current valuation of their business is that in many cases buyers and sellers have different ideas of what the business is worth which often leads to a stalemate in the acquisition process. A third party valuation lends credence to the asking price and what a buyer is willing to pay.  A valuation provides the basis for starting negotiations related to the transaction and assists in the due diligence process by the buyer.

Lisa, you focus a lot on the due diligence process with our clients.  What is due diligence anMatuszny_Lisad how does it work?

When a buyer is prepared to purchase an existing business they want to know that the business is sound and that any financial data provided is accurate which is the purpose of due diligence. Professionals are engaged by the buyer (often a CPA and attorney) to review:

  • All of the seller’s financial information
  • Business structure
  • Tax situation
  • Potential legal issues
  • Large contracts and partnerships
  • Employees / benefits and a myriad of other issues

A due diligence engagement can be structured as a top level review or a very detailed review – but, it is up to the buyer!

What if I am selling a business?

You will want a valuation to determine what your business is worth and to help set an opening price for negotiations.  A buyer will expect certified financial statements for 2-3 years (and for as many as 5 years) that were prepared by a CPA – audited financial statements are ideal; reviewed or compiled financial statements may be acceptable depending on the size and nature of your business; failing that, a CVA may be able to use tax returns provided that additional data to “normalize” the tax information is available.

Lawrence, you are a CVA.  What does this designation mean and what do you do?

A Certified Valuation Analyst (CVA), like myself, is an individual that has specific training in valuation methods and analysis as certified by the National Association of Certified Valuators and Analysts (NACVA).  We have completed rigorous testing and case study work to be able to identify the most appropriate valuation techniques for your transaction. We can perform valuation engagements for individuals or companies that need them for a variety of business, legal and personal issues.  

Even if you are not actively looking to buy, sell or merge with an existing business, you should have a current understanding of what your business is worth.  When you have that need, it is important to work with a valuation expert, like Lisa and Lawrence, who will spend the time understanding your business to make sure you receive a fair valuation.

If you are interested in finding out the value of your business or maybe you are thinking about a buy/sell transaction, contact Lisa at or Lawrence at or call our main office at 216.524.8900.

What’s the Value of Your Business? It’s a Perfect Time to Find Out.

by: Lawrence A. DeBaltzo, CPA, CGMA, CVADeBaltzo_Lawrence

As a business owner, your time is spent trying to build up your business, keep your customers happy, fend off competitors, and pay your employees. You know you’re adding value to your organization by making these investments, but do you have any idea how much? Do you ever wonder what your business is actually worth?  While it is a question you should ask yourself, you don’t have to wonder.  We can help you find the answer.

While many services provided by Hobe & Lucas help you to run your business, business valuation services help you understand the value of your business in the marketplace so that you can make smart decisions. You may simply be curious to know the value, and that is certainly fine. Also, there are a number of very practical reasons it can be important to know your company’s value.

How could you benefit by having a better grasp on your business valuation? Consider the following questions as thought starters:

  •      Is there a chance you might ever sell your business? – Both the buyer and seller will likely want to know the value of a business in order to have a starting price point for negotiations.
  •      Might you ever gift partnership interests or corporate shares of your business? – When making taxable gifts, it is a great idea having a valuation to use for Internal Revenue Service purposes.  The value used on your gift tax return is then based on widely accepted valuation techniques.
  •      Will you be doing any estate planning? – Gifting is an essential part of any estate plan, but since gifting can only occur during our lifetimes, establishing values for the closely-held businesses that are held in the estates of business owners is also important—especially if an estate will be large enough to require the preparation of Federal estate tax returns.
  •      Do you have a succession and/or exit plan? – As a business owner, you have built up your business and now you are looking toward retirement.  You may want to shift your business to the next generation or to a group of skilled managers. By establishing a value for your business, you will be prepared to discuss and negotiate your exit from the business.
  •      Are you prepared for shareholder or partner disputes? – Shareholders and partners don’t always see eye to eye, unfortunately.  These disagreements may turn into disputes that may require litigation.  Valuation services may be employed to help resolve these issues by determining the value of an interest for a potential payout to an exiting shareholder or partner.
  •      Have you considered repercussions of marital disputes? – Marriages may be made in Heaven, but divorces surely come from elsewhere.  While not a pleasant thought, valuation services may be employed here to help resolve disputes over marital business assets.

As you can likely see, business valuations serve many purposes, and there’s never a better time to start investigating it than now. A Certified Valuation Analyst can help, delivering an appropriate report based on your specific needs and circumstances. The training required to be certified in this field may be rigorous, but navigating the process of arriving at a conclusion or calculation of value doesn’t have to be.

Need to know the value of your business? Call us at 216.524.8900 for a free consultation or fill out the contact form below and we will be happy to work with you to discover that value.

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