By Roman Basi and Marcus Renwick
Let me ask four tough questions: (1) Do you own a business that your family depends on? (2) Are you a partner in a business with or without a buy-sell agreement? (3) Are you in a difficult family situation? (4) Do you think you want to sell or retire from your business? If you can answer yes or even maybe to one of these questions, you need a valid business appraisal.
Many business owners are not familiar with what a business valuation is, why they need a valuation, and how to get a valuation done. In fact, many business owners are more familiar with the value of their house or automobile as opposed to the value of their business. This is surprising because their business may be worth more or carry more equity than their house! In the business world, not knowing the value of a business can translate into the loss of a lifetime of work in value and dollars.
A business appraisal/valuation is a report by a qualified appraiser in written form meeting various specifications set by the IRS and other agencies and governing bodies. They are complex in nature and often, people don’t know how to get started and even fear or dread the entire process.
In this 1st article, the following information explains how most professionals approach a business appraisal project:
The first step is to have a candid discussion with the appraiser and all the necessary parties. Often times this will include all the owners of the company and any key person in the company that may be a point of contact. I typically spend about an hour on the phone with all the parties understanding the need and purpose for the valuation.
If after the initial conversation, the appraiser believes they can successfully complete the project, they may request a preliminary review of the financial information of the Company. Most often this information consists of 3 to 5 years of tax returns and the most current financial statements they may have. Later they will request and need a substantial amount of information, but this preliminary info gives them a better picture of what they are walking into. Oftentimes I find that the “Company” actually consists of more than one type of legal entity, which leads me to request additional information regarding all the entities that make up the “Company”.
Within a week of receiving the preliminary financial materials, we then discuss with the Company what we are seeing in the financial information and how we can help them with their Business Appraisal.
After the appraiser has analyzed the information and discussed it with the Company, then the terms of the engagement can be communicated and agreed upon between all parties.
Soon thereafter the first of two on-site visits are scheduled. The purpose of the first on-site visit is to give the appraiser firsthand knowledge of the Company’s operations, assist in gathering all of the data necessary to begin the valuation, and meet with the key people. Most appraisers have a list of information that they will request in advance of this meeting. The list I use consists of 31 requests for information. While that may seem exhausting, the list is used as a guide during our first on-site meeting, and together I help the Company gather as much of the information as possible.
The data is then analyzed and the process of creating the Valuation commences.
I then personally like to have a conference call with everyone involved 3 weeks after the date of the first on-site visit. You may be asking, “Why 3 weeks? Why not 1 week or 2 weeks like a regular real estate appraiser or a half-hour for a car appraisal?” Businesses do not consist of only one asset. Not only do most businesses have real estate and a car or multiple vehicles that need a value assigned to them, they have many other assets.
In addition to the assets that are easy to spot on depreciation schedules, businesses also have assets that have fallen off of balance sheets due to being fully depreciated. Also, what is known as “goodwill” and other intangible assets created, nurtured and even impaired at times during the existence of many businesses may not be on the books. All of this has to be accounted for using not one, but multiple approved methods as required by the IRS.
During this call, we start to discuss all of this, including what information we have, what we are missing, what methods we are applying to the valuation, and the overall scope of what remains to be finished.
Three weeks after the conference call, I then like to schedule the 2nd on-site visit, during which the draft of the valuation is presented to the Company. The purpose of this on-site meeting is to review the entire valuation with the Company and discuss any changes that the Company and appraiser may want to make to the final product. Once those changes are made, the valuation can then be put into final form and signed by the appraiser.
This is the typical process for conducting a business valuation. In the next issue, we will discuss the methods used in a business appraisal, who can create an appraisal, and when specifically your business needs an appraisal.
The Center routinely does business valuations and appraisals along with business succession, tax work, mergers, acquisitions and other representations in front of the IRS and taxing bodies. Contact our office at (618) 997-3436 in order to start a project, discuss the idea or even just go over our 31 item list of needed information.