Archive for May, 2011

A common reason business people need to have their business appraised is gift and estate tax situations. Business ownership grants by living owners to family members trigger a gift tax liability.

If an owner passes away, the business is inherited by other partners or family members. One rather unsavory chore they need to handle quickly is how to pay the very large estate taxes. The tax bite of up to 50% of the business value can be very painful.

Business valuation that holds up to scrutiny by the tax authorities

As a rule, business owners are interested in the highest possible business valuation result. This is certainly true when the company is offered for sale or an outside investment is sought, whether venture capital or debt financing. A partner buy-in is another situation that calls for the highest defensible business valuation.

Valuations for gift and estate taxes are quite different. Since the tax is levied on the current business enterprise value, business owners are interested in the lowest supportable valuation.

If your business valuation is too low, expect the tax authorities to be skeptical. Experienced tax agents are aware that business people want to reduce their taxes. Even if you retain skilled accountants and attorneys, a business valuation that is too low will likely draw the attention of the tax man.

If fact, the tax authorities may come up with their own valuation for your business. You will have to defend your appraisal if their number is considerably higher than yours.

Business valuation standard of value for gift and estate tax appraisals

Fair market value is the typical standard used to value businesses in these situations. The subtle difference you need to know about is that the definition of this standard may differ from that used in business acquisition scenarios.

Specifically, gift and estate tax valuations consider what the business is worth to a hypothetical business buyer without regard to special synergies that could result in a higher potential business selling price. If you plan to use the income based methods such as the Discounted Cash Flow, be aware that conservative earnings forecasts are usually acceptable as long as they are realistic.

Business valuation: points of contention

Business owners, their professional advisors and tax agents usually clash on these points:

Since your business valuation result depends upon a set of assumptions made, tax agents can challenge you on your financial forecasts, business risk estimation, as well as the definition and premise of value used.

Business valuation is about the future outlook of earnings and risk. Will the business revenue continue to grow at the historic 5% a year? Will the industry sector become more risky over the next 5 years?

Will the business continue running as usual or need to exit some markets and drop some products? Will the business need to expend considerable resources to acquire new assets? Depending on the answers your valuation results may vary quite a bit.

Marketability discount and business sales comps

Tax agents usually understand that a private company is harder to sell than shares of stock in a publicly traded firm. The question is the amount of marketability discount applied when valuing a private business based on comparable business sales.

If you have a reliable source of comparable private business sales, you can offer very defensible evidence in support of your business valuation. The guideline public company method is another way to compare your business to similar small to mid-size public companies in the same industry.

Control premiums and minority discounts

This is another common bone of contention between business people and tax agents. An unreasonably high discount for lack of control reduces the value of the business ownership interest – and taxes due.

You can come up with defensible minority discounts by citing control premiums paid by public companies that acquire controlling stakes in other firms. Since public companies must disclose such transactions, you can review the control premiums and calculate a sensible minority discount from these data. Case law in your jurisdiction may shed additional light on what is usually acceptable in gift and estate tax valuations.

Business Valuation using Three Standard Approaches

ValuAdder engineering and marketing experts have teamed together to hit a major milestone right on schedule – the release of our latest business valuation software – ValuAdder V5.5.

Completely reviewed, updated and current for 2011, ValuAdder V5.5 gives you a powerful, easy-to-use yet comprehensive business valuation system. The entire product has been fine-tuned to help you create expert business valuations to fit your needs – and the current market conditions.

Critical updates to ValuAdder in 2011

As market conditions change, so does business value. For this year, we have introduced a number of critical updates to make sure your valuations truly stand out:

  • Discount and capitalization rates data
  • All industry valuation multiples
  • Discounts for lack of marketability (DLOM) and minority discounts

Now you can ensure that every business appraisal you create is accurate, defensible and relevant this year!

New additions to ValuAdder V5.5 in 2011

Plus, we have worked hard to add a number of useful features to the ValuAdder business valuation tools. Here are the top ones:

Market Comps industry coverage increased to 425 key industry sectors

In 2011 we have added a number of key industry sectors for your market-based business appraisals.

These include the biotechnology and health sciences companies, a completely revised software industry group with the business and consumer software application and security software sectors, as well as the diversified food products manufacturers.

Valuation multiples across all 425 industry sectors have been fully revised and updated to reflect the changing market conditions for 2011.

All this information is fully integrated into your ValuAdder product to help you avoid costly database subscription fees!

Company size risk premia ranges increased up to $500 million in market capitalization

In 2011 we have added five distinct size risk premia ranges to help you calculate the discount and cap rates precisely for your company.

You can now create highly accurate business appraisals for any private company – from the smallest businesses to mid-market industry leaders with market capitalization up to $500 million!

DLOM and minority discounts

ValuAdder worksheets now feature the discounts for lack of marketability (DLOM) and minority discount data tables.

You can use this essential information when valuing partner’s ownership interests for buy-sell agreements, partner buy-out and more. DLOM is applicable whenever you need to adjust your valuation multiples derived from guideline public companies for use in valuation of privately owned businesses.

Discount and cap rate that are up-to-date

You now have access to the most accurate and up-to-date data to calculate your discount and cap rates – critical to the accuracy of your business appraisals.

Updated Learning and Information Center and Handbook

Here you will find full, up-to-date coverage of all aspects of valuing a business and structuring successful transactions. Now there is added coverage on business valuations across a number of important situations including gift and estate taxes, buy-sell agreements, divorce, Employee Stock Ownership Plans (ESOPs) and more.

Consult best practices and suggestions on how to comply with all major business valuation standards including USPAP, AICPA SSVS, and International Valuation Standards (IVS).

Support for latest computer systems

You can install your ValuAdder product on any computer system including Windows 7, Vista, XP and Mac OS X machines. All 32 and 64-bit computer systems are supported!

Enjoy a dramatically lower total cost of ownership as you use the same ValuAdder on any computer of your choice.

ValuAdder V5.5: See it for yourself!