Today’s “baby boomers,” age 53 and over own the majority of businesses in the United States and the majority of them do not have a clear cut “exit strategy” or “succession plan.” The following are some of the difficult questions that the “boomers” are finding themselves confronted with.

• Do you know how valuable your business has become? 
• Are you planning for retirement? 
• Do you have children participating in your business that will someday inherit your legacy?  
• Are you about to enter into litigation with a disgruntled shareholder or angry spouse?

Selecting the Right Level of Service

Does a business owner really need a “full blown” valuation to give him the tools with which to either negotiate a sale or calculate his retirement “nest egg?”

The purpose of the valuation dictates the appropriate level of service required and can often dictate the cost of preparing a valuation.  The following list provides some of the purposes: 

• Business and succession planning (including retirement planning)
• Mergers and acquisitions
• Litigation (including shareholder disputes)
• Marital dissolution
• Estate and gift tax

CALCULATION ENGAGEMENT

Calculation of Value

A Calculation of Value may be used for estate and/or retirement planning purposes.  The Calculation is less in scope and the abbreviated report is generally restricted in its use and/or restricted to a certain set of users.  Since the Calculation of Value does not include all the procedures required to express a Conclusion of Value, it provides a lesser level of assurance making it more difficult to defend in court and would not likely be acceptable to the IRS for these same reasons. 

A calculation of value is based on an agreement between the business owner and the appraiser.  Used as a tool for strategic planning or to facilitate a settlement, a calculation of value allows for fewer procedures, leads to a calculated value and is usually less costly.  A calculation of value is performed when:

1. The valuation analyst and the client agree on the valuation approaches and methods the analyst will use as well as the extent of procedures the analyst will perform in the process of calculating the value of a subject interest and
2. The valuation analyst calculates the value in compliance with the agreement. 

It does not provide the business owner with the valuation analyst’s opinion or conclusion.  In fact, the analyst is required to disclose to the business owner that a valuation engagement may have resulted in a different value and that difference may be material.

VALUATION ENGAGEMENT

A valuation engagement is intended to put the business owner in a much stronger position.  In addition, most valuation analysts would not be willing to testify in a courtroom without having performed a valuation engagement.

Conclusion of Value

A Conclusion of Value is warranted when required for estate or gift tax purposes and provides you with an estimate as to the “fair market value” of your business holdings.  The Conclusion of Value is attached to either your gift or estate tax return and is subsequently submitted as part of the filing with the IRS. 

When expressing a Conclusion of Value for estate or gift tax purposes, the analyst is required to follow applicable IRS regulations and adhere to professional standards.  The analyst is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances.  Finally, as part of the determination as to “fair market value” of the entire company, real property and tangible personal property appraisals should be obtained from independent qualified appraisers.  The valuation analyst then includes these property appraisals as part of his or her valuation of the company’s business operations.

Each engagement is unique, but, in general, the analyst must perform an analysis of the historical financial information, interview company management and perform extensive research on comparable companies or, in the alternative, perform extensive searches for guideline companies.  The financial information must often be adjusted before it can be used in the valuation process in arriving at the final “fair market value” of the business. 

Upon wrapping up the engagement, the analyst takes the following points into consideration:

• The valuation analyst may use two or more valuation methods to estimate a company’s value and may often narrow the choice down to a single value by either subjectively or mathematically weighting the values computed using the different valuation methods;
• The value estimate should be tested for reasonableness considering one or more sanity checks;
• The analyst may adjust the value by applying any appropriate premiums and/or discounts.  These may include minority interest discounts, control premiums, and/or discounts for lack of marketability.

In any event, consulting with a qualified valuation professional as well as legal counsel is the best course of action to decide which level of service is right under the circumstances. Dermody, Burke & Brown has experienced Certified Valuation Analysts ready to assist you with the assessment of your business.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.