Your business value is important. And that\u00b4s exactly why you need to act before it\u00b4s too late.<\/p>\n
One of your most valuable assets is your business, and understanding its value is crucial for making informed decisions about its future\u2014meaning your <\/em>future. Impacted by the success of your business are your time and emotional investment, fulfillment, and, at the end of the day, the future wealth of you and your family. In this article, we\u2019ll specifically mention four valuation purposes whereby understanding what your business\u2019 value is today and what drives this value, will allow you to take action.<\/p>\n This action could mean:<\/p>\n In all these examples, what is the basis or main value from performing a quality business valuation? Answer: minimizing the associated risks. <\/strong>As with most things, having little or inaccurate information increases your risk of poor decision making. When it comes to your most valuable asset, making decisions hastily or incorrectly is something you simply can\u2019t afford. Not just because of the financial damage, but also due to the emotional damage and loss of time, all of which will doubtless have you lamenting \u201cwhat could have been\u201d.<\/p>\n As you reach the pointy end of these situations in which an external party is scrutinizing the business value\u2014be that the IRS, DOL (Department of Labor), SEC, or a potential buyer\u2014the derived value and the valuation report must be able to withstand that scrutiny. If it doesn\u2019t, whether due to poor execution, inaccuracy, unsubstantiated assumptions, and so on, this can lead to audits, investigations, penalties, improper taxation, and deal losses, any and all of which can cost you hundreds of thousands or even millions of dollars and heartache.<\/p>\n Regardless of the life cycle stage or situation you find yourself and your business in, there are four main valuation purposes that should be immediately considered, evaluated, and ultimately acted upon.<\/p>\n \u201cIsn\u2019t estate planning only for when I\u2019m about to die?\u201d This is a common misconception. Your estate, though passed onto a party or entity of your choosing when you die, obviously exists while you\u2019re living, too. It\u2019s an evolving legal representation of your ownership and wealth, which for maximum performance should certainly be managed properly while you\u2019re still alive. It shouldn\u2019t be considered solely when you\u2019re on your death bed. Worse still is leaving your estate planning unmanaged until after death, which will cause significant time\u2014as well as emotional, legal, and financial pain\u2014for those left behind.<\/p>\n Taking action and working with your advisors will help lead to proper corporate structures, which limits your legal and tax exposure. As part of this process, your advisors will need to conduct a business valuation, and should do so as early as possible. Ideally, it should be handled when the value of the business is lower than what it will be in future years at the time of death or transition of wealth to another party or parties. This will allow the tax assessment to be conducted on the lower yet accurate amount. If the proper corporate structures and quality valuation have not been conducted, the IRS can easily take up to half of the estate\u2019s value in taxes, and then you\u2019re in an \u201cit\u2019s too late\u201d situation.<\/p>\n You want to minimize this risk through quality advice and proper, well-substantiated valuation. Correct corporate structures but poor-quality valuation still invites the IRS to audit, investigate, and apply penalties and fines\u2014not to mention the fees you\u2019ll need to pay enduring the ordeal.<\/p>\n A complete guide to valuation for estate planning can be found here in this e-book.<\/p>\n Another key reason to understand the value of your business is for strategic planning purposes. This has the same underlying idea, in that knowing the accurate value of your business provides you with quality information with which you can make informed decisions. This then lowers your risk of making poor choices and experiencing negative outcomes, be they financial or otherwise. Often with strategic planning or exit planning, a full appraisal report is not required\u2014 not at this point anyway.<\/p>\n We often start with an exploratory report which, as the name suggests, explores information to uncover options and possibilities. A state-of-the-art valuation process is still implemented as-is for the full appraisal\u2014however, you don\u2019t get the lengthy report, because outside scrutiny from regulatory agencies isn\u2019t occurring. This exploratory report provides several things other than the value itself, which is always presented as a valuation range, in which we discuss the reasons why that can put you at the bottom, top, or middle of that range. During the assessment of the business, a full risk analysis is completed, and an understanding is gained of what the value drivers of the business are. All this information then lets you evaluate your goals and options. Do you want to undertake an expansion, and can the business afford that? Should underperforming business lines be closed or restructured? Do you need to look for external investors or bank financing? Or maybe this is the opportune time to initiate an ESOP?<\/p>\n Strategic planning then ultimately leads to exit planning. Eventually, we all exit from our businesses, which is why estate planning (as mentioned previously) is crucial. The exploratory report then turns into a full appraisal for when submissions to the IRS, DOL, or often potential buyers are required. Withstanding the outside scrutiny, this is where the state-of-the-art process and comprehensive report delivers an extremely defensible value.<\/p>\n Without the knowledge, your options are more limited.<\/p>\n An ESOP (Employee Stock Ownership Plan) is a way to give employees an ownership stake in the company in a way that is very tax favorable to both the owner and employees. It\u2019s also a qualified retirement plan for the owner. This can be a great way to attract and retain top talent; the employees gain motivation and alignment with the company because they share in the profits in a tax advantaged manner, while liquidating a portion of your shares (as determined by you) at attractive levels with tax incentives as the owner and still being involved in the company at an operational or strategic level. There are several benefits to an ESOP for a) the employees that buy into the company, and b) the owner, who is transitioning the company into this new ownership structure.<\/p>\n As you can imagine for such a situation in which employees (who are probably unsophisticated investors with no experience as business owners buying into the business), the government and the relevant regulatory institutions have strict and very specific laws, regulations, and policies. These policies ensure the employee\u2019s financial well-being is protected (to a certain level) through this process, and rightly so. This creates a large amount of risk around the validity and veracity of the valuation of the company and the common share value. This is because it will be highly scrutinized by the DOL and IRS in order to protect the employees, ensure they are fairly compensated, and mandate that the correct taxes will be paid.<\/p>\n Below, an oversimplified explanation of how this functions:<\/p>\n The valuation must stand up to the highest levels of scrutiny. As a result, the trustee will use an accredited appraiser who has the correct accreditations and experience. They will be able to prove their state-of-the-art valuation process, customizable to the specific case facts, to arrive at the conclusion of value, which will be well-substantiated within the valuation report. This will be what\u2019s ultimately submitted to the Department of Labor (\u201cDOL\u201d) and IRS.<\/p>\n At InteleK, we undertake ESOP transaction and review valuation engagements with the highest level of independence. In addition, we acknowledge the situational importance of ESOPs to the various stakeholders involved. We apply our state-of-the-art valuation process that\u2019s built on robust, well-established methodologies from a sophisticated legal and financial basis, in which the data drives the value, both qualitative and quantitative. This process derives unmanipulated and highly defensible conclusions of value.<\/p>\n If you\u2019re planning to sell your business, it\u2019s essential to have a clear understanding of its value. Again, if you\u2019re not armed with this information, you\u2019re at a higher risk of making poor decisions that will negatively impact you, financially or otherwise. An accredited appraiser conducting a valuation will provide you with the value (most beneficial for this purpose to be a value range), clearly identify the risks (on a sliding scale of high to low), and explain what the main drivers of value are. What the appraiser should also do, as we do with our clients, is speak to what will push the business to fall at the top, bottom, or middle of that range. This enables you to work with your advisors to have the correct legal structures, operational improvements, and risk minimization, preventing a potential buyer from paying less than what\u2019s desired.<\/p>\n During the initial valuation (again, an exploratory report is the best way forward as the first step), there are several items uncovered that can impact the business\u2019 value negatively. These things are identified, as well as what impact they have on the value. If found early enough, they can be fixed before the sale needs to be made. In other words, problems are mitigated when you still have enough emotional energy to do so, not before it\u2019s \u201ctoo late\u201d. Some common examples:<\/p>\n Overall, preparing a company for sale takes a fair bit of time and requires a lot of work. It\u2019s important to start planning early so that the company is in the best position possible to attract the right buyer at the right time.<\/p>\n Extra info<\/strong>: once you\u2019ve successfully sold the business, there will be submission of valuation reports for tax and financial reporting purposes. These will require a full appraisal report of high quality to be able to withstand the outside scrutiny.<\/p>\n Understanding the value of your business is essential for minimizing your risk, which isn\u2019t simply limited to when a valuation report needs to withstand outside scrutiny. It also comes down to minimizing the risk of poor decision making\u2014ones that cost you thousands or millions of dollars\u2014not to mention the heartache and loss of time. Whether you\u2019re planning your estate, making strategic decisions, preparing for a sale, or considering any number of other valuation purposes, finding a credible and quality appraiser will be well worth the investment.<\/p>\n Don\u2019t wait until it\u2019s too late. Act now and protect your wealth and legacy.<\/p>\n","protected":false},"excerpt":{"rendered":" Your business value is important. And that\u00b4s exactly why you need to act before it\u00b4s too late. One of your most valuable assets is your business, and understanding its value is crucial for making informed decisions about its future\u2014meaning your future. Impacted by the success of your business are your time and emotional investment, fulfillment, […]<\/p>\n","protected":false},"author":1,"featured_media":7459,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[176,177],"yoast_head":"\n\n
Estate Planning<\/strong><\/h2>\n
Strategic\/Exit Planning<\/strong><\/h2>\n
ESOP<\/strong><\/h2>\n
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Sale Preparation<\/strong><\/h2>\n
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Conclusion:<\/strong><\/h2>\n