Is There “Value” In A “Valuation”?

Could someone put a value on your business, built from the bottom up, supported by reputation and goodwill, and the hard work ethic of your employees?

I walked into a small confined industrial shop with my client and looked around. I immediately recognized the blood, sweat and tears that had been poured into this company over the years. Could someone put a value on this business, built from the bottom up, supported by reputation and goodwill, and the hard work ethic of the employees? The owner (seller) looked at me and asked how a valuation of his company could be determined, what would be needed, and what to expect in terms of cost, time frame and future valuation needs.

The owner was selling his business and we had been hired to value the company for the buyer. It helped to explain to the owner the importance of a valuation, the documents and information that would be required in order to complete the valuation, and what expectations he could expect from a valuation.

In this two-part article, we address those same issues regarding valuations and also identify the major components of a valuation. Part I presents the various purposes of a valuation and what you need to have one completed. Part II, which can be read exclusively in the online issue of Welding & Gases Today, discusses the qualifications of an appraiser, how the valuation is done, and what to expect from the results of the valuation.

The Purpose of a Valuation
There are many different purposes for which you may want to have your company valued. First and foremost is that you may be contemplating selling your company and have no idea of the actual value. A valuation will establish a range in which you can feel comfortable knowing this is the average price a willing buyer would purchase the business for in this economy. Without a competent valuation, if you sold too quickly, you would be forever wondering whether the price you sold for was too low. In reverse, if the company is taking too long to sell, your hindsight may ask you if the price is too high. A valuation will cure this second guessing by giving you definitive benchmarks from which to guide your decision-making process. You can leave the transaction feeling that you made a competent decision and one that was economically feasible.

No one is willing to buy a company that has not determined a value. The valuation step in the process of selling your company is the most crucial element of a profitable transaction.

The second reason for a valuation is if you are purchasing a business. If purchasing another company, the selling party may not have done a valuation, or you may not agree with the one that was done. A valuation is done to provide you with a benchmark from which to compare the prospective purchase. If you are still in the market for a strong company, but have not yet identified a potential target, having a valuation of your own company will give you the ability to spot a good deal, and recognize that an investment should be made.

Gauge Your Company’s Success
Do you know where you should be spending your money? Do you know what activities and markets increase your company’s value the most? These are additional reasons to have a valuation completed. You can easily gauge the success of your company by completing an annual valuation. By constantly updating your valuation, you will be able to monitor the increase in value due to such things as advertising, product lines and integration of existing products. Without a valuation, it is difficult to determine the overall net effect these items have on the value of a business. If you notice a characteristic that substantially increases the net worth of the company, you can increase your attention to that part of your business and multiply its effects on the value of your company.

All of us in the business community have a goal. Some goals are individual, and some are for the company that we operate. A valuation will help keep you on track to reach these goals, inform you of how far off you are, or how close you are to reaching the end point. Your goal may be to sell the company for a certain price in a number of years; by updating your valuation on a regular basis you will be able to determine whether the value has increased enough to meet this goal.

Is your financing adequate? Could it be better? Perhaps a lower interest rate or additional capital would allow you to obtain certain projects. A current valuation can help to show the banker your actual financial position. It can also help to show the bank that you are on top of the current status of the company and that it is being monitored all the time. Spending a few dollars for a valuation could mean real savings when it comes to the financial capabilities of your company.

A Proactive Solution
Another reason to have a valuation completed is the case of a company dissolution. Whether this has to do with a corporation or a simple partnership agreement, a valuation can be the key to a smooth “winding up” period. In troubled times such as dissolutions and break-ups, nothing can be more stressful than trying to determine the value of the company and the value of each individual owner. Arguments over value can be substantially reduced, resulting in huge savings for the company in terms of legal fees and wasted time.

If your company is growing, you may be seeking partners and investors. Having a current valuation of the company, and comparing it to past valuations, is a great tool in attracting investment dollars. Anyone can walk into a company and attempt to get a feel for the success and commitment that may be involved. But armed with a current valuation, some of the fears may be lessened and the picture will be much clearer.

A valuation is also an effective tool for your employees. If you are thinking of an ESOP (employee stock ownership plan), the value of the stock in the ESOP must be determined annually. Therefore, your employees will know the current value of their interest in the company.

In the unlikely event that a case should arise involving breach of contract, loss of business opportunity, antitrust violations, condemnations or other legal issues, the valuation of the business will help aid the court in reaching a reasonable damages award.

Finally, a valuation should be performed for estate planning. Not only does the IRS require a valuation to be done in order to assess the proper estate and gift taxes, but having a valuation referenced in your will can help to eliminate costly and damaging will contests. It will also give you peace of mind knowing exactly how much you have passed on to individuals. Rather than trying to guess the value of the gift of your company, the valuation will help to identify the specific value that will now be associated with that gift.

What Do I Need?
Once you have determined a purpose for the valuation, it is then common to ask, “What do I need to help complete the valuation?” It is important to gather certain information to help accelerate the process and provide a true and accurate picture of the position of your company. The Sidebar presents a list of some of the documents and items that need to be gathered in order to complete a valuation. Depending on the purpose of the valuation, this list can be expanded or contracted. It is important to keep in mind that facilitating the valuation will help to not only provide a complete and accurate picture, but will reduce the time spent on the project, which will reduce the cost to you.

Conclusion
Large and small companies all over the world have many different reasons for having their companies valued. However, completing a valuation is no easy task. The documents and materials that must be assembled and analyzed are not for the faint of heart. It takes a skilled eye and a trained mind to determine what portions of the company are worth more than others. Hard work and dedication do figure into the final value, and it is these factors, coupled with the market, that determine the valuation range.

A valuation of your company is one component on the road to success. Don’t let the opportunity to succeed pass you by because you failed to understand the “value of a valuation.”


Gases and Welding Distributors Association
Meet the Author
Bart Basi, CPA, and Roman Basi are attorneys at law with The Center for Financial, Legal & Tax Planning Inc., located in Marion, Illinois and on the Web at www.taxplanning.com.