Author: Bob Plaskon

A question I am asked frequently is: Can this business be valued?

I have written multiple blogs recently on various scenarios including:

• Part 1: Valuation of a business that has been operating for years, but with incomplete or poor financial data.
• Part 2: Valuation of a start-up
• Part 3: Valuation of a nonprofitable business

Then I realized there is another category of business: businesses that are worth more closed than continuing to operate.

This does not necessarily mean the business is not profitable. The business is typically technically viable, generating income and in some instances, profitable. That is why they do not fall into the category of the businesses discussed in Part 3 of this blog series.

So what is going on that makes a business more valuable shut down?

Often the business has been operating for many years. The owner or owners are satisfied with the income derived from the business. In many cases the real estate associated with the business has appreciated significantly over the years. Additionally, for many businesses in this category, other assets, including heavy equipment, have been acquired over the years and the metal itself has value.

An overview of determining value of these businesses

In prior blogs in this series, I emphasized the importance of financial forecasts as an important starting point in the valuation process. In these circumstances, the forecast reveals the business is not viable. Applying the asset approach to valuation, I focus on the underlying assets of the business where real estate and equipment tend to be the business’ most valuable assets. Valuation is determined based on establishing the liquidity value of each asset, including real estate. The result of the detailed valuation analysis is that the business is worth more by closing and liquidating its assets than it is by continuing to operate.

Common triggers for valuing such a business

As one would expect, one trigger for needing a valuation of a business in this category is bankruptcy. The valuation is leveraged to determine payouts to debtors.

Another trigger for needing a valuation of a business that is worth more closed than continuing to operate is when the business is losing money and the situation is not fixable. Like the bankruptcy situation, the viable option is liquidating the business. The business valuation is the sum of the value of the underlying assets of the business.

The other trigger is settling an estate. Usually, the business has operated for many years and the owner or owners were satisfied with the income generated and their modest lifestyle. To settle the estate, the valuation of the business determines that more value would be generated by closing the business and liquidating the assets than continuing to operate.

Conclusion

As these four blogs have described, any business can be valued. The key is to secure a certified business appraiser, a professional who focuses on business valuation, with a proven track record and process so that the valuation is objective, thorough, and defensible should it need to stand up to scrutiny.

Whether selling or buying a business, allocating assets as part of a divorce, settling an estate or settling a shareholder dispute, when you need a business valuation, contact us.

When values matter.

Contact us.

A common question I am asked is: Can this business be valued?

In the first blog in this series, we focused on determining the value of a business that has been operating for years, but with incomplete or poor financial data. The second in the series focused on valuation of a start-up. And finally, this third blog is how to determine valuation of a nonprofitable business.

How do you determine the value of a business that is not profitable?

Forecasts are an important starting point in the valuation as written about in Part 2 of this series. A forecast is still relevant and an important factor in developing the valuation for a business that is not profitable. The reality is the value may be determined to be zero or negative should debts exceed valuation. In this situation, the seller may be interested in securing the tax benefits of a zero or negative valuation.

Typically, there are two scenarios when determining the valuation of a business that is not profitable. The value is tied to the people, or the business value is largely driven by an idea. Talented people and disruptive ideas are value drivers in a business and the use of public data can support the valuation of people and/or a disruptive idea.

In either situation, the valuation is developed by gathering and analyzing available information. The valuation prepared answers the question: how would a hypothetical buyer evaluate this business?

My thorough process leverages public data about businesses with talented teams and/or valuing an idea before it has been taken to market. Risk is then applied as it is especially important when calculating the value of a non-profitable business, similar to a startup. With expenses exceeding revenues, a higher level of risk will be applied.

Conclusion

Over the decades of developing business valuations that stand up to scrutiny, I have prepared detailed business valuations for firms having zero revenue as well as for business owners having an idea, but no product or service.

Determining the value of a non-profitable business can be done and is done with relative frequency. While not the most common situation I encounter, the steps to preparing a thorough and objective business valuation remain the same. Available public information, market information, and experience all support developing financial models that withstand the reasonable test and apply a risk factor to determine the valuation applying the discounted cash flow method.

If you are wondering if your business can be valued, you now know the answer is yes. Now it is important to secure a certified business appraiser with the knowledge, proven approach, and experience so that the valuation is thorough and defensible.

When values matter.

Contact us.

A common question I am asked is: Can this business be valued?

In the first blog in this series, the focus was on determining the value of a business that has been operating for years, but with incomplete or poor financial data.

The focus of this blog is on valuation of a start-up business.

How do you determine the value of a business in its infancy?

The starting point is the business owner’s forecast. Business owners typically have a forecast of projected revenues, expenses, capital expenditures, and income. The ideal starting point is having an income statement and balance sheet for the next ten years. The reality is the business forecasts I start with vary considerably: some may be a profit and loss statement for the next three years, with no balance sheet forecast. Whatever the owners have is my starting point and the ideal is rarely what I am starting with to prepare the valuation of a start-up business.

Building the Forecast

My next priority is to expand on the forecast from the business owner(s) and work with management to fill in the gaps. Sometimes capital expenditure planning is scant, or assumptions for market penetration, number of clients, or average revenue per client are needed for me to further expand the forecast.

Building and expanding the financial forecast is the foundation for developing the business valuation. While rudimentary valuation approaches may simply average the last three years of revenues and net income, venture capital firms and prospective buyers of a business are unlikely to accept this simplified calculation. Given the pandemic and its far-reaching effect on industries and businesses, an average of the past three years of revenue and net income is unlikely to represent a future business’ performance. The financial model I build looks forward, documenting key inputs and assumptions to pass the reasonableness test.

Factoring in Public Data & Risk

After working with management to augment the forecast, I turn to analyze public data. Useful public data includes price to earnings ratios as well as public information to incorporate into a regression model regarding returns based on the business’ financing stage.

Risk is applied when determining the value of any business. It is especially important when calculating the value of a start-up business. There may be no revenues and no history to support the forecast. That is where a higher level of risk will be applied.

Accounting for risk is factored into the discounted cash flow analysis. We have long embraced the discounted cash flow method, an approach that more business valuation professionals now utilize. This is the most accurate method. Once the forecasted financials have been expanded/developed in the above-described steps, now we factor in risk. The higher the level of uncertainty, the higher the rate used to discount the projected earnings.

Public data enables me to analyze rates used in valuing companies based on financing stage. A company with two to three rounds of financing will have a lower risk factor than a company at the seed level stage for financing. For self-funded start-ups, the financing stage is irrelevant, so risk excludes public financing data, but accounts for market and business risk inherent to the business.

Conclusion

Over the decades of developing business valuations that stand up to scrutiny, I have prepared detailed business valuations for firms having zero revenue as well as for business owners having an idea, but no product or service.

Determining the value of a start-up business can be done and is done frequently. Available public information, market information, and experience all support developing financial models that withstand the reasonable test and apply a risk factor to determine the valuation applying the discounted cash flow method.

If you are wondering if your start-up business can be valued, you now know the answer is yes. Now it is important to secure a certified business appraiser with the knowledge, proven approach, and experience so that the valuation is thorough and defensible. You have put a lot of time and effort into your start-up, do not sell the business short with an overly simple calculation.

When values matter.

Contact us.

It’s that time of year when taxes are top of mind. No one wants to pay more than is required. Business valuations can have a significant impact on tax liability and IRS compliance. Read a few examples below of the importance experience and expertise have in achieving the desired outcome.

1. The Risk of Double Taxation

Eight owners of a C-corporation were preparing to sell the business. The transaction was at risk as its structure as an asset-based sale put the owners at risk of significant tax liability in the form of double taxation.

The owners needed a business valuation to determine fair market value and total goodwill to restructure the deal and minimize tax liability. Lou Pereira developed the business valuation and then built a multi-variate model to calculate each owner’s goodwill. With the valuation, modelling, and analysis completed by Merrimack Business Appraisers, the deal was restructured, and double taxation was avoided.

Read the case study.

2. Compliance with IRS Section 409 and Reducing Tax Liability

Like many businesses, attracting and retaining talent was a priority for this rapidly growing company on the west coast. This company was experiencing hypergrowth and included in its compensation package stock grants to attract professional executive managers.

The firm’s owners contacted Lou Pereira to develop a business valuation of the stock to comply with IRS Section 409A. Lou’s methodical and thorough valuation substantiated the value determination, satisfying the stringent requirements for Section 409A compliance.

Please read more about how the tax liability for the company was reduced.

3. A Sale & Donating Shares to Charity to Minimize Tax Liability

Two owners of a business decided to sell their business. One of the owners wanted to donate proceeds from the sale to charity to minimize his tax liability. To the average person, this may appear straightforward, but Lou Pereira was fully aware of the IRS requirements for charitable contributions. Incorrect sequencing and timing of actions could result in the IRS disallowing the charitable donation as part of the sale.

Lou Pereira prepared the business valuation, including determining the value associated with the shares donated to charity. The sale was completed and all actions were executed for the seller to achieve his goal of securing the tax deduction, minimizing tax liability and supporting the charity of his choice.

Please read more about this case.

Contact a proven certified business appraiser to prepare a thorough and objective business valuation that can stand up to scrutiny, including the IRS.

When Values Matter. Expertise Matters.

Contact us.

Over the years, I have taught accounting and finance classes at Fitchburg State University, Southern New Hampshire University, and Franklin Pierce College. When asked, “Why do you teach?” it prompted me to think about the profound impact teaching has had on me and the ongoing benefits to my profession as a certified business appraiser. It is especially top of mind as I take on a new teaching challenge in 2023.

My Teaching Journey

It started back when I was in the Army. Ongoing learning was a focus in the Army as we would teach a new skill in a classroom setting. Then early in my corporate career, I expressed the desire to improve my presentation skills. A seasoned professional advised me to teach, noting that teaching required you to learn the materials and develop an effective way to present the material. I took his advice and started teaching at Franklin Pierce University in their adjunct college, teaching working adults on weekends.

In my early days of teaching, I stayed one chapter ahead of the students, working to master the content and plan the lectures. Over time, I became more comfortable with the process and particularly enjoyed thinking on my feet as students asked about concepts or in some cases, questions out of nowhere!

I then started teaching in the evening program for undergraduate students at Fitchburg State University, my alma mater, teaching every course in the accounting curriculum. I thoroughly enjoyed this experience, getting to know the accounting majors as they progressed through the curriculum. I still remember writing a job recommendation for an undergraduate accounting student who went on to get his MBA and CPA, working for PWC. Witnessing this accounting student’s professional advancement and experiencing students in their ‘aha’ moments when concepts clicked, those are wonderful rewards of teaching at night and on weekends while working full-time. Teaching at my alma mater was a special form of giving back to a community that had helped shaped me.

As many people know, I like to talk. That is another reason why I teach. I enjoy sharing ideas and hearing what the students think. It has been particularly rewarding to teach veterans, single mothers, and first-generation college students. They have a thirst for learning, a palpable desire to succeed and a commitment to actively participate in the learning process. Plus, they bring their life experiences to the classroom for a dose of reality and welcome perspective.

Going Virtual

When the pandemic hit, teaching changed. While the learning objectives and homework assignments remained the same, the delivery mechanism and how to present effectively changed. It was imperative that I adapt quickly to improve my delivery, offering a quality learning experience to the students amid so much change and uncertainty. Like others, I was learning on the fly on how best to teach virtually including engaging and communicating with the students. Recording classes and incorporating on-line discussion boards to help students throughout the course became part of my teaching style.

Mastering Curriculum Development – The Next Level in My Journey

The pandemic led to the International Business Brokers Association (IBBA) seeking to take its continuing education program to the next level. As a member of the IBBA’s education committee, I had taught multiple courses in the past at the IBBA’s annual national conference which I had very much enjoyed. The organization is a collaborative organization that places great emphasis on continued education, which I respect and thoroughly embrace as a professional. But this was, once again, a learning opportunity for me. The IBBA sought a higher-level education opportunity for its experienced members who had earned their highest certification, Certified Business Intermediary (CBI) designation. This was taking my teaching to the next level as I was developing the curriculum in addition to teaching as the Master’s Program launches this year. This was another milestone in my teaching journey as the curriculum is mine.

The Intersection of Teaching & Presenting as a Business Appraiser

I have attained the highest level of certification available for a business appraiser. That is not by accident, but as I reflect on my journey, that is fueled by my desire for continuing to learn and improve. While it is essential that I stay current in my profession, I have benefitted greatly from my teaching experiences. I have gained the skills of documenting and presenting large amounts of information in a clear and logical manner, which has served my clients well. Being able to explain complex concepts in a clear and understandable way helps students learn. It also helps attorneys and judges understand how I have arrived at the business valuation presented in a document and in a courtroom.

As I reflect on that advice received many years ago that I should teach to hone my presentation skills, I am struck by how that advice has affected my life. While I know I will continue to push myself to learn and grow, I am humbled right now to prepare and deliver these master courses as part of this 10-month virtual cohort learning program for experienced and credentialed business brokers looking to take their careers to the next level. My immediate challenge is to foster structured discussion, keep the pace, and deliver tremendous value to accomplished business brokers. And as I have learned over the years, I will learn a great deal from them to refine my curriculum, improve my skills, and continue my teaching and learning journey.

Why do I teach? It is rewarding, challenging, and keeps me on my toes.

Louis J. Pereira has completed the most intensive training in the country and earned the highest designations available in the field of business valuations. There are fewer than 200 Certified Business Appraisers in the country and Lou is one of them. In New England, Louis J. Pereira is one of only a dozen having earned the rigorous designation of Certified Business Appraiser. Learn more about Lou Pereira here.

When Values Matter.

Contact us.

We turn the calendar and we face the unknown. For some, it is a time of excitement and anticipation while for others, a source of uncertainty and foreboding.

What will the New Year bring for you and your business? More importantly, are you taking charge to make 2023 your year?

If selling your business is top of mind for 2023, there are three points to consider:

1. Taxes
2. Your business COVID-19 story
3. Demand

Taxes

As the saying goes, nothing is certain, but death and taxes. As we look ahead, it is certain that tax rates will increase as tax laws are set to expire. This includes the expiration of tax laws that promoted business deductions (e.g., Section 199A) for select industries, directly increasing tax liability of businesses in the coming years. Additionally, the Massachusetts Millionaires Tax went into effect this year.

If you are thinking about selling this year or prior to the expiration of such tax incentives at the end of 2025, now is the time to review and revise plans for your business including tax and estate planning. Gifting shares is an effective way to transfer ownership of your business to the next generation or to trusted employees, while effectively managing tax consequences.

Your Business COVID-19 Story

We now have enough data to tell your business COVID-19 story. Just like back in 2001, 2003 and 2007, there is sufficient evidence to determine which of the following five categories describes your business COVID-19 story:

1. Wounded and will die
2. Wounded and will recover
3. Not affected
4. Temporarily did better and then levelled off. (e.g., restaurants that pivoted to focus on take-out)
5. Did better and then turned success into a strategic advantage, gaining market share.

What category represents how your business did? As business valuation professionals, we now have enough data from the start of the pandemic through today to tell your COVID-19 story. Sufficient data of nearly three full years supports presenting the impact of such unusual times while reporting how your business performed as the months continued. The data will tell your COVID-19 story and the business valuation will present the objective details of your businesses performance over time.

As we know, the pandemic was the last straw for many baby boomers, who sold and retired at a record setting pace. Understandably, the pandemic was a reality check; a vivid reminder of the fragility of life and the importance of aligning values and priorities with one’s work life. This priority remains important which leads to the third consideration: demand.

Demand

The most common concern of a business owner is often, who would be interested in buying my business? If you are considering selling your business, you can assume there is interest in your business. Demand is there and it falls into two primary categories:

1. Buying a job: many buyers are looking to buy their next job. The pandemic raised the focus of achieving that elusive ‘balance’ and where businesses are forcing a return to the office or ramping up travel or other demands, individuals are balking and seeking to buy a lifestyle that suits their priorities.
2. Private equity firms: there is a lot of money held by private equity firms seeking to acquire businesses.

Conclusion

For most business owners, the process to sell does not happen within a 12-month period. It is a longer process to address and improve the balance sheet, develop a succession plan, and focus on driving value. However, that does not mean that this cannot be your year. Three key considerations, briefly described above, all point to the favorability of making 2023 the year to act. Taxes will increase so you have a window of opportunity. Your COVID-19 story is known, and there is likely demand.

Should this year be your year, contact us if we can assist you in achieving your goals by developing a business valuation.

When Values Matter.

At the National Association of Certified Valuators and Analysts (NACVA) Conference in June, Lou Pereira received the Massachusetts State Chapter President Leadership Award. “Being recognized in this way is a tremendous honor for me,” Lou observed, “adding that the success of the Massachusetts State Chapter is due to the efforts of the entire board who work to bring the best business valuation training programs here.”

The conference brought together on Zoom many of the best known thought leaders in the business valuation field. It provided the opportunity to discuss new and old issues with other top business appraisers.

NACVA is a global, professional association that delivers training from the nation’s leading experts in consulting fields such as business valuation, financial litigation forensics, expert witnessing, forensic accounting, risk fraud management, mergers and acquisitions, business and intellectual property damages, fair value, healthcare consulting, and exit strategies. Along with its training and certification programs, NACVA offers a range of support services, reference materials, software, and customized databases to enhance the professional capabilities and capacities of its members.

NACVA’s Certified Valuation Analyst (CVA) is the only business valuation credential accredited by the National Commission for Certifying Agencies (NCCA) and the American National Standards Institute (ANSI).

Read more about Lou Pereira’s qualifications…

As July 4^th approaches, Americans seem poised to celebrate Independence Day with more spirit than ever. Yet, here at Merrimack Business Appraisers, independence holds meaning for us all year long.

In order to promote and preserve the public trust, our appraisal practice observes the highest standards of professional ethics, including an unwavering commitment to independence. This means that we are free from outside control, obligation, or bias due to a personal interest.

The Appraisal Foundation, a private, non-profit educational organization and the nation’s foremost authority on the valuation profession, ensures that an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.

• The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP) has established ethical and performance standards for the appraisal profession in the US. Adopted by Congress in 1989, USPAP is updated every two years so that appraisers have the information they need to deliver unbiased and thoughtful opinions of value. Read more…
• The selection of a business appraiser must be undertaken with great care, as issues affecting valuation can be complex and confusing. USPAP provides important guidance in the form of Advisory Opinions and Frequently Asked Questions. Read more…
• Louis Pereira has completed the most intensive training in the country and earned the highest designations available in the field of business valuations. There are fewer than 200 Certified Business Appraisers in the country, and Lou Pereira is one of them. In New England, he is one of only a dozen having earned the rigorous designation of Certified Business Appraiser. Read more…

At Merrimack Business Appraisers, we are here to help when you need a business valuation. And you can always count on our independence.

Did you know that an appraiser must promote and preserve the public trust inherent in appraisal practice by observing the highest standards of professional ethics?

We at Merrimack Business Appraisers pride ourselves on being unfailingly objective.

The Appraisal Foundation, a private, non-profit educational organization, ensures that an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.

The Appraisal Foundation is the nation’s foremost authority on the valuation profession. The organization sets the Congressionally-authorized standards and qualifications…and provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals.

(Source: Uniform Standards of Professional Appraisal Practice 2020-2021 Edition, The Appraisal Foundation, page E.)

The Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP) has established ethical and performance standards for the appraisal profession in the US. Adopted by Congress in 1989, USPAP is updated every two years so that appraisers have the information they need to deliver unbiased and thoughtful opinions of value. Read more…

The organization also provides important guidance in the form of Advisory Opinions and Frequently Asked Questions. The issues affecting valuation can be complex leaving the marketplace often confused which is why the selection of a business appraiser must be undertaken carefully. Read more…

Louis Pereira has completed the most intensive training in the country and earned the highest designations available in the field of business valuations. There are fewer than 200 Certified Business Appraisers in the country, and Lou Pereira is one of them. In New England, he is one of only a dozen having earned the rigorous designation of Certified Business Appraiser. Read more…

At Merrimack Business Appraisers, we are here to help when you need a business valuation. And you can always count on us for objectivity.