When Might a Business Owner Need to Hire a Valuation Expert?

When may a business owner need to hire a valuation expert and why?

So, let's play pretend. Just roll with it. We are now entering the land of This Never Happened.

Thirty years ago, when we are 20-year-old freshman in college, you and I started an animal transportation company called the Critter Shipper. We each put in $400 bucks and we had a 1980 Chevy C-10 pickup.

You put in $400 = 100,000 shares = 50% ownership

I put in $400 = 100,000 shares = 50% ownership

Total Invested = $800

Need a VALUATION to see what the 100,000 shares of equity, your half of Critter Shipper, is worth today. I mean... if you just want the $400 back, I am good with that (wink). Any time you pay someone their share of the company, due to death, retirement, disputes, etc. you must determine what the value of the company is as of that date.

Scenario One

We are now 50-years-old, the Critter Shipper Corporation is known nationwide and is doing $2.6 million in sales each year and you would like to retire and sell your half of the company.

Those are some of the main reasons we are retained for business valuations.

Many companies request valuations annually as part of their normal operations. They want to see how changes in price affected them. Or their main supplier who they get 50% of their rubber from, raised prices by 20% and they want to see the effect. Some compensation packages are based on valuation results.

Many companies get financial forecasts, usually to present to a bank or a potential partner or investor. They are projecting or estimating what the cash flow of the company will be in the future and discounting it back to today with an interest rate that captures the risk of achieving those cash flows. That is one of the three valuation approaches used in an valuation engagement.

So, to recap the reasons we may be retained for business valuation:

• If anybody comes in the front door or goes out the back door for ANY reason (died, gifted, sold, retired, invested) it triggers a valuation.

• If the courts or IRS need it for divorce, lawsuits, to value your estate at death, gifting, etc. It triggers a valuation.

• For internal planning purposes
  
  

*** UP COMING BLOGS:

Parts 2 and 3 - Risk Silently Killing the Value of your Company

The Valuation Expert hired by the family of Michael Jackson battles the IRS all the way to the Supreme Court over the value of his estate. Wonder who won?!

Scenario Two

When we started Critter Shipper, we each invested $400 and we each got 100,000 shares. Now, the company is making millions and we want to bring in new investors. The investors want to invest $500,000. Wow. How many shares of ownership, or equity, do we give the investors in return for their $500,000 investment?

Scenario Six

I am so sorry, but you have died. My condolences. The IRS requires your estate (what you own when you die) to pay taxes if your assets are over a certain dollar amount, or threshold.

Need a VALUATION to see what each share is worth today. Just like Scenario One. Anytime any is coming in or out of the company, for any reason, its probably going to trigger a valuation.

Scenario Three

Same scenario, but instead of you retiring and cashing out, you want to start gifting 10% of your ownership in the company (which is 100,000 shares) each year to your only child because there are no tax implications for either of you, the giver or receiver, up to a certain dollar amount, or threshold ( $19,000 in 2025 per recipient. Note, there are other rules, but let's keep it simple). How many of your 100,000 shares can you gift before you reach the threshold of $19,000?

You own 100,000 shares. How many can you gift before you reach $19,000? Need a VALUATION to see what each share is worth (VALUE OF COMPANY / 200,000 shares = value per share)

Scenario Four

Same scenario, but instead of gifting or retiring, you are getting divorced (whomp whomp) and the judge says you must split everything you own 50/50 with your spouse, including those 100,000 shares in Critter Shipper.

Scenario Five

Scratch all of that. You are staying. Yay! But now, someone set fire to our largest transportation hub and we lost 60% of our vans used to transport the critters and couldn't operate for a month. We hired a lawyer to sue the arsonist and they were found guilty. But, how much money did we lost while we were shut down?

Need a VALUATION to quantify our lost profits. When a jury awards damages in a case, they don't determine the dollar of the damages. An expert witness, like myself, will testify. When we testify in a lost profits case, we will quantify the damages for each possible outcome (see below) still leaving the decision of guilt with the jury. So any lawsuits, divorce, malpractice, estate disagreements... all involve a valuation analyst usually.

If you find them guilty of A, the damages are $1 million.

If you find them guilty of B, the damages are $5 million.

If you find them guilty of C, the damages are $10 million

Need a VALUATION to see what your half is worth today.

Need a VALUATION to value your half of the company, 100,000 shares, to see how much estate tax your heirs have to pay. Hopefully you did gift some of shaer shares to your son. Most of us are beneath this threshold, but estates can certainly get complicated. The beneficiaries of Michael Jackson's estate found the IRS on the valuation of his estate all the way to the Supreme Court and won. I've had an estate with 26 companies and that was enough!

Understanding the Risks that Affect Business Value

Most business owners focus on revenue, profit, and growth. But experienced buyers and investors evaluate companies very differently. They look closely at the operational risks that can impact future cash flows, such as:

• Customer concentration

• Owner dependency

• Operational inefficiencies

• Weak internal controls

• Limited management depth

• Supplier and supply chain risk
  
  

These factors often appear long before they show up in the financial statements, but they can significantly affect how a business is valued.

If you're interested in learning more about how these risks influence business value, visit our Business Consulting Blog or explore the Risky Business diagnostic session, where we identify the risks specific to your company.