For over 45 years Capital Valuation Group has specialized in helping owners of privately held companies in Wisconsin and across the United States resolve business valuation, ownership and transition issues. Below are some of our most often asked questions.
Q: Why should I have an independent appraiser perform a business valuation?
A: For most business owners, a significant portion of their personal wealth is invested in their closely held business—yet, they do not know the value of this investment. A business valuation can help the business owner effectively plan for the future and provide guidance for increasing the company’s value. Valuations completed by an accredited appraiser ensure that fair and reasonable values are placed on businesses by using industry standard methods with proven results and confirmed references. Reliable opinions of value are necessary for many reasons, and each valuation engagement may require a different approach and utilize different assumptions. A multiple of a number on your income statement does NOT give you a meaningful conclusion of value.
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Q: Should I have a valuation done even if I don’t plan on selling my business right now?
A: You may need a business valuation for a number of reasons: management planning, financing, divorce, estate planning, succession planning, buy/sell agreement, employee incentives, litigation, or other reasons. A valuation often helps in the management planning process as business owners learn what drives value and ways to increase value.
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Q: I am selling my business and have already reached an agreed upon price with the buyer. Is there any reason to have a business valuation completed?
A: You have one opportunity to sell your business. Confirming that you are receiving an equitable price for the business can provide assurance and peace of mind. Also, if the buyer is looking for bank financing, most banks finance closely held business loans only if they can include the Small Business Administration’s (SBA) loan guarantee. To obtain this guarantee, the SBA requires that an independent business valuation be completed if the buyer is borrowing $350,000 or more. Our firm has worked with the SBA to develop a valuation product that meets their requirements while containing fees.
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Q: How does Capital Valuation Group determine what my business is worth?
A: The fair market value of your business can be determined by an accredited business valuation expert using one or more of the following approaches to value:
- The Asset Approach—typically provides a “floor value” for the business appraisal as it presumes that a prudent investor would pay no more/less for a business than its adjusted book value. This approach does not typically recognize or consider the future earning power of the business.
- The Income Approach—values the business based on the future economic benefit of the business attributable to a new buyer. It considers both the return on investment to the buyer as well as the inherent risk associated with that return.
- The Market Approach—values the business based on the comparison of the subject company to its peer group. This approach is based on the principle of substitution, assuming that a prudent investor would gravitate to the investment of lowest price if all other metrics and risk factors were the same.
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Q: Isn’t the “value” of something just its “value?”
A: The word “value” means different things to different people. Business commerce, the courts and the IRS have established many definitions or standards of “value” for many different purposes. Some of these standards are described below:
- Fair market value – this is the most common standard and is defined as “the amount at which a property would change hands between a willing buyer and a willing seller, when neither is under compulsion to buy or sell and both have reasonable knowledge of all relevant facts.” It is also important to characterize the willing buyer in this definition. See Capital Valuation Group’s Prospect Ranking Chart for a ranking of potential buyers of a business based on willingness to pay more (or less) for an equity interest in a closely held business.
- Fair value – commonly used in situations such as dissenting shareholder actions, minority oppression cases, and dissolution actions. Fair value is defined differently depending on state statutes and accounting regulations, but typically refers to pro rata value, without discounts for lack of control and possibly without discounts for lack of marketability.
- Investment value – the value of an investment to a particular investor or class of investors, based on individual investment requirements and distinguished from fair market value, which is impersonal and detached. See Capital Valuation Group’s Prospect Ranking Chart (add link) for a ranking of potential buyers of a business based on willingness to pay more (or less) for an equity interest in a closely held business.
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Q: So my “friend” just sold her “service” business for “five times” earnings. Is this a universal benchmark and a simple way to establish a reasonable price for my own business?
A: No. Every closely held business is unique and has different risks and opportunities that need to be reflected in its value. Accounting, under Generally Accepted Accounting Principles (GAAP), was never intended to reflect value. Therefore, applying a multiple to some line on the financial statement is an exercise in math, but does not result in a meaningful indicator of value. To understand the value of a company we need to look at far more than the company’s financial statements. Here are just a few examples of the many things that should be considered when valuing a closely held business.
- Is this a transferable business or an individual’s career? See Capital Valuation Group’s discussion from An Introduction to Business Valuation.
- Is the business dependent on any one customer for a large percentage of its total revenues?
- Does the business’s future look different from its past (typically true of closely held businesses)? If so, how?
- Does the business intend to increase/decrease its workforce?
- Does the business have contracts with its customers?
- Does the business have contracts with its suppliers?
- What is the competitive environment for the company?
- Is there pending legislation that might affect value?
- Does the business have facility and equipment capacity for growth without significant additional capital investment?
- Does the business have an overreliance on one or more key executives?
- Is there a competent, ongoing management team in place?
- Are there unionized labor issues?
- Are there potential or known environmental issues?
- Are adjustments needed to “normalize” earnings?
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Q: How long does it take to have a valuation completed?
A: Once the requested documents and information have been provided, it generally takes 4 to 6 weeks to complete the appraisal. When the situation requires a faster turnaround, we work to prioritize the project and complete it within the client’s needed timeframe, whenever possible.
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Q: How much does it cost?
A: The cost depends on a number of circumstances specific to the business. Some of these include:
- The purpose of the valuation
- The complexity of the project
- The quality of financial and other information
- The availability of documents and information
- The complexity and dispersion of ownership and equity rights
- The end product—if the valuation will be used for internal planning purposes a calculation report, which could be a summary letter (with supporting schedules attached) will suffice and fees can be contained. If the valuation will be used for tax filing (estate or gift tax) or for testifying in court, a fully documented, written report must be completed, and this is more expensive.
We find it best to meet initially, typically at minimal or no cost, to gain an understanding of the purpose of the appraisal and the nature of your company. This allows us to make an informed proposal of expected fees.
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Q: What are the steps taken during a typical business valuation?
A: The steps taken by Capital Valuation Group for a complete appraisal generally are as follows:
- Establish the purpose and parameters of the valuation
- Request documents and pertinent information about the business
- Review information received and analyze historical financial information
- Meet with owners/management to discuss historical trends and necessary normalizations for non-recurring or discretionary items, the future business plan and outlook, key risks and opportunities
- Research the current economic and industry trends
- Research our internal, as well as external, databases for mergers and acquisition data and/or guideline public companies
- Develop valuation model
- Determine the cost of equity and weighted average cost of capital to determine the present value of future economic benefits.
- Develop public company market analysis and comparable company transaction analysis as appropriate
- Reconcile the results of the various valuation methodologies and arrive at value for 100% of the business enterprise.
- Subtract debt to arrive at value for 100% of the equity
- Analyze the security (the specific block of equity being valued) for such factors as voting rights, preferential rights, transfer rights or restrictions. See Capital Valuation Group’s Block Ranking Chart (add link)
- Determine and apply appropriate premiums and/or discounts for control and marketability
- Review valuation methodologies and conclusions with client
- Report indications of value in appropriate written form
- If required, provide expert testimony to support our analysis and findings in deposition and/or trial.
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Q: What information is needed to prepare the business valuation?
A: We typically request information regarding:
- The company’s financial history and outlook
- Organizational and legal documents relating to the ownership of the company
- Prior transactions or valuations
- Legal agreements that affect operational control or enhance/restrict transferability
- The company’s facilities, suppliers, customers, employees, competitors
- The company’s intangible assets such as patents, copyrights, licenses, and customer lists
- Planned investment in capital expenditures
- Any contingent liabilities such as litigation and environmental issues
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Q: Is the information kept confidential?
A: We understand the sensitive nature of a company’s internal information and treat the information with the utmost confidentiality and care. Information related to our clients is never discussed or released to outside parties without prior authorization.
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Q: What size clients does Capital Valuation Group serve?
A: All sizes – most of our clients generally range from startup companies to companies with revenues in the $1 million to $20 million range.
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Q: Does Capital Valuation Group specialize in any specific industries?
A: Our firm has been valuing companies since 1974, so there are few industries that we’ve not analyzed and researched as part of our valuation process. That said, there are five industries in which we have continued to do a significant amount of valuation, including teaching at the industry’s conferences. These include the Artisan Cheese Industry, the Dairy Industry, the Dental Industry, the Plastics Industry and the Manufacturing/Integration Industry.
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Q: Does Capital Valuation Group value intangible assets?
A: Yes. As part of our practice, we provide valuations of intangible assets. These include such things as goodwill, patents, trademarks, copyrights and other intangible assets at all stages of development.
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Q: Can my CPA appraise my business?
A: While most accountants concentrate on accounting or tax work, a CPA probably can appraise your business. However, most accounting firms have one or two individuals, trained in accounting, to work on valuation projects, when they occur. Compare this to a firm that has a team of professionals with diverse training/backgrounds in accounting, law, finance and business and applying this training to the business appraisal exercise. Additionally, for purposes of divorce, other litigation or due diligence, the company’s CPA can be seen as too involved with the business to provide an independent opinion (conflict of interest). Additionally, some accountants do not have the necessary valuation training, credentials or experience to produce a credible analysis. See a
summary of valuation designations and the requirements for obtaining each.
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