How Much Is Your Business Worth
By Derek Carawan, AAMS
A couple of months ago I wrote an article on Succession Planning, where I made mention of getting your business evaluated. Now I want to delve deeper. Whether you want a “rough” number or a more realistic one, it boils down to using the resources that are available to you and knowing where to find these resources. I thought the best source of information would be a CPA/CVA (Certified Valuation Analyst). Since the NCPGA membership is statewide in scope, perhaps the best resource for finding a CPA/CVA is http://www.nacva.com/DIR/. This site will allow you to search by city and zip code. I recently ran a search for Ashville, NC. The search returned the names of over 20 CPA/CVAs. Chris Tikvart, a partner with Neal, Bradsher and Taylor, is a CPA/CVA (Certified Valuation Analyst). He is one of a couple of CVAs in the Triangle area. I recently interviewed Chris for this article and asked him a series of questions.
What are 3 to 5 things that business owners need to know regarding appraisals/valuations of their business? “The owners should check their ego at the door. The numbers could come in lower than you think. Get some professional advice from a CPA or attorney who is a licensed business evaluator. Understand the tax ramifications of a stock sale versus an outright sale of the company. Some business brokers will use a ‘rule of thumb’ approach to value a business. It may be advisable to go a little deeper in order to get a good formal written evaluation.”
How long does the process typically take? “A good formal written evaluation could take 3 months to process.”
Should an evaluation be done even if there is no foreseeable event? “No, but a CPA with the proper skillsets (not all may have all of these skills) or a CVA can provide some general calculations. If you are thinking about selling a business 3 to 5 years from now, then yes, it may make sense to initiate a thorough process to evaluate the business. This process can help you shore up some areas of the business that may be weak.”
What things can make the most significant impact, positive or negative, on the value of a company? This is where Chris covered a lot of information. Maybe we can provide some more detail on this in a future article. But one of the many things that he said regarded the difference between “Personal Goodwill” and “Practice Goodwill”. He expounded on this by saying basically that if a company is successful because of the owners relationships to customers and in the owner’s absence the business would suffer dramatically, then such a business might be very hard to sell. However, if there is a way to somehow shift this goodwill from the owner to the company, then the valuation of the company could increase a great deal. This is an excellent reason why you would want to consider hiring a CVA 3 to 5 years prior to a sale date. It could take that long to transfer personal goodwill to practice goodwill.
If an owner is considering selling, should they try to do it this year for tax reasons? “Don’t make decisions just based on taxes alone. Base it on value. Sell when conditions are right for selling. Taxes are not primary but they are a part of the consideration process.”
In the best of circumstances, how long should it take to finalize a sale? “It depends on the size and complexity of the business. But, a non-disclosure agreement should be in place before the interested party begins their due diligence. This is followed by price negotiations and getting the attorneys to draft the proper documents.”
*Derek Carawan is a LPL Financial Advisor and LPL Registered Principal with Carawan Financial Partners, Inc. / Securities offered through LPL Financial/ Member FINRA/SIPC and may be reached at, www.carawanfp.com, 919-870-8181 or firstname.lastname@example.org
These views are those of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. TRACKING #1-100103