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.
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 firstname.lastname@example.org or Lawrence at email@example.com or call our main office at 216.524.8900.