50 Reasons for a Business Appraisal

Creating Value for Business Owners and Board Members

In this article, Edward Mendlowitz, CPA, ABA, CFF. shares his views regarding the importance of having a business valued. He identifies 50 ways that a valuation professional can provide something far more valuable than a number. While the valuation profession is under pressure to reduce costs or prepare a report, the business owner is better served in the long run retaining a valuation professional that provides greater insight to operations.

The true market value of a business is only determinable when it is sold to an independent buyer–and even then it is only for that time with that buyer. However, there are many reasons for valuing a closely held business that can provide valuable insights to the owner; these same reasons also underscore how credentialed professionals add value to business owners and board of directors.  These are also not commodity services that warrant a low fee.

A business is an important asset of the owners–it provides their living, independence, a degree of financial security, and, if properly handled, a payout when the owners are ready to retire.  It is often more valuable than the value of their personal residence.

Running a business causes owners to make dozens of decisions daily, many times without much advance thought and consideration. Unfortunately, it can become easy to lose perspective amidst competing priorities and deadlines. Having the business objectively and comprehensively valued—leading to a Conclusion of Value or a Calculation of Value—provides a look into how others would view the business, the size and scope of the asset that has been created, and identification of important and sometime latent value drives. The process of having the business valued can provide benefits far greater than the nominal cost.

Here are 50 reasons for valuing a business.

1. To know what the business is “worth”
2. To have an idea how the market would value the business should you want to sell
3. To establish a process that would make the company more marketable should the owner decide to sell or when they are ready to sell
4. To evaluate an offer from someone who that has expressed an interest in buying the business
5. To create a bigger playing field for the owner to assess the results of their decisions or potential for wealth creation
6. To show how wealth is created and that can indicate a strategic direction to go in
7. To show how an initial operating cost can become an investment and how it can be recouped by increased value of the business
8. To place the owner in a position to measure the business in terms of value creation and not on the immediate profit (or loss) from a transaction
9. To identify value drivers
10. To possibly uncover areas of the business that can be exploited for greater current profit as well as long term growth
11. To identify weaknesses or areas that dissipate value
12. To establish a buy-sell agreement and a method of automatic adjustments
13. To update buy-sell agreements
14. For shareholder or partner disputes
15. To freeze out minority owners
16. To consider and use the value in connection with the purchase of business or owner life insurance
17. To determine built-in gain for conversion of a C Corporation to an S Corporation
18. For owners’ personal financial planning
19. To use on owners’ personal financial statements
20. To use as a guide to determine retirement or buy out payments to the owner
21. To indicate the value for credit purposes
22. To value assets and asset impairment for GAAP, that is, financial statement purposes
23. To be used as a guide to determine reasonable compensation
24. To plan for a (tax-free) merger with a supplier or competitor
25. To allocate costs in an acquisition or merger
26. To assist the dream of going public and capitalizing the business’ value
27. For gift tax purposes such as ownership transfers to a child, donations to a charity, transfers to grantor trusts, or installment sales to a defective trust
28. For estate tax reporting purposes
29. For an estate’s division of assets where the business will go to one beneficiary and to offset assets to another
30. To assist a beneficiary in selling an inherited share of a business
31. For succession planning
32. To set up, or value, an employee stock ownership plan (ESOP)
33. For stock compensation awarded to employees including restricted stock and stock option plans (including 409A purposes)
34. To determine a base line and value growth for phantom stock arrangements
35. To value assets in a marital dissolution
36. For prenuptial agreements
37. To value a business in a bankruptcy (Chapter 11 or small business case)
38. To distinguish between enterprise (or business goodwill) and personal goodwill
39. To establish economic damages should there be a loss from a disaster and lost cash flow
40. To use as a benchmark to measure the business’ “growth”
41. To provide measures of key numbers and ratios with peer companies
42. To be used in or to get started with strategic planning
43. To see if an independent appraiser can uncover hidden value
44. To determine if there is value greater than, or separate from, the present operations such as strategic value
45. To indicate how to recognize, maximize, build, or grow and realize full value of strategic value
46. To raise owners’ mindsets from daily operations to that of creating long-term and sustained value
47. To understand the illusion of value and ways to make the value a reality. For instance, value can be lost very quickly when exposed to risks such as damage to reputation and regulatory overreach and valuations can assist in identifying the importance of this
48. To create a vaster vision for the business owners
49. To be used periodically as a tool to track the ways value is created assisting in strengthening the business
50. To help identify whether the business is a growing, stagnant, or wasting asset

Valuations are serious undertakings and can be extremely revealing; the business owner(s) seeking a low-cost engagement will miss some of the important benefits associated with a valuation by opting to retain a professional–especially one that is not credentialed—to develop the number or value. When properly and thoroughly done, the valuation engagement has the potential of identifying a host of issues and opportunities with the potential of adding value.  Those that own an interest in a business should consider having it valued on a regular basis so that they will gain insight, possibly realign the strategy, and position it to grow and create value.

Edward Mendlowitz, CPA, ABV, CFF, is partner emeritus with WithumSmith+Brown, PC, in New Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York and is Accredited by the American Institute of Certified Public Accountants (AICPA) in Business Valuation and as a Personal Financial Specialist (PFS). The author of 24 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters and presented over 200 CPE programs. He writes a twice a week blog at www.partners-network.com Mr. Mendlowitz can be contacted at (732) 964-9329 or by e-mail at emendlowitz@withum.com.