- What is a Small Business?
The Small Business Administration defines small by various standards, Those standards permit businesses to have as many as 500 employees in some SIC codes and sales exceeding $28 million in other codes. The private investment market commonly describes businesses that sold for a price between $5 million and $50 million as middle market. This is to distinguish them from small businesses which are thought to have values below the $5 million value.Small business owners typically have a focus on doing those things within their business that bring them the greatest after tax benefit possible. There are prerogatives of control that cannot be realized in public companies or even in larger private companies that are unique to the small business.
- What is the value of my business?
The value of a business may vary dependent on the purpose of the valuation The business appraiser must understand the purpose for which the appraisal is being performed. See the definition of Fair Market Value and question if it applies to the situation.
- What is Fair Market Value?
The most common reference of the definition of Fair Market Value used in business valuation is found in Revenue Ruling 59-60. This ruling from 1959 provides the basic directions from the IRS as to the valuation of privately held companies and the oft quoted definition of fair market Value.As “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed concerning the property and the market for such property.”
- Why should I have my business appraised? When the value attributed to your business matters then you need an appraisal by an independent expert. There are many different reasons or purposes to value a business. In the end most of these boil down to taxes and dispute or disagreement with others over the value. There can be dire consequences to using the wrong value or using a value intended for one purpose when it was meant for another.
- Why not use a Rule of Thumb or multiples of publicly traded companies?
Only if your company is very similar to the public companies you are analyzing, in terms of all of the different factors that effect the value of the public stock. The fact that your company is not public makes it different in one very important factor. Choosing the appropriate multiple requires an in-depth analysis of the company to properly understand how it correlates to the public market if at all.
- What determines the cost of an appraisal? Is it like my house just $250?
Unfortunately, no! The scope of the work that you require, the purpose of the appraisal, and the complexity of your business are the three most important factors in determining cost. Our work may vary from a several hours to more than 100 hours of time. Based on discussions with either you, or your advisor, accountant or attorney, we can prepare either estimates of time or fixed prices to prepare the report you need.
- I am thinking about selling either part of or my entire business. Do I need an appraisal?
Depending upon the size of the business, the need for an appraisal depends on the individual. If you want to use the appraisal report as an offering document to help justify how the value was determined, it may prove to be worthwhile. For most of our clients, we generally suggest a consulting arrangement based on agreed upon procedures which will be much more cost effective.
- If I give my son or daughter stock in my company, do I need an appraisal?
We recommend that an appraisal be performed whenever a potential gift tax is involved. If the Internal Revenue Service audits the gift, the burden of supporting the value of the property given is on the taxpayer. A well documented appraisal will establish the value of the gift and show the I.R.S. that the valuation was properly performed. In fact, the I.R.S. requires a “Qualified Appraisal” be performed by a “Qualified Appraiser” for many tax filing situations.
- Can’t I have my company’s CPA appraise my business?
We have the utmost respect for the CPA profession. Unfortunately, very few CPAs have the necessary expertise and credentials to value a business. Ask your CPA if he or she is accredited in business valuation by the American Institute of Certified Public Accountants (only 2,600 of the 330,000 AICPA members are accredited in business valuation – that’s less than 1%) or any other appraisal organization.In today’s business environment there may also be some fundamental conflicts of interest for your CPA in providing business valuation services for clients that the CPA provides tax, audit or other services for. The potential conflict of interest could be an issue if the appraisal is contested.As independent appraisers, we work with our client’s accounting, financial and legal advisors to gather the necessary information to perform an unbiased business valuation. We also depend upon their cooperation to complete our assignment.
Shifting The Burden Of Proof
In certain tax matters, filing a “Qualified Appraisal” as defined under IRS Regulations shifts the burden of proof from the taxpayer to the IRS.
A mid-sized manufacturing company was owned by two partners that no longer wanted to work together.
MBA was retained by both parties to determine the fair market value of a 50% ownership interest in the business so that one partner could buy out the other. The report fully documented the value, and both parties accepted the value without further negotiation.
The clients saved the cost of litigation.