4Thought Blog

In today's environment, it's important for business owners to focus on the value of their company and what drives it. The objective of this article is to look at value drivers for operating businesses, as opposed to businesses that are asset-based, such as real estate or securities holding companies.

Under the market and income approaches, operating businesses are valued based on how much cash flow they're expected to generate in the future. In other words, cash flow drives value.

If you want to increase value, you need to increase sustainable cash flow.  Notice, we said the sustainable cash flow. While it might look good to have a short-term increase, an educated buyer will see through any non-sustainable increases and adjust those in determining the purchase price.

While preparing your succession or estate plan, it can be helpful to value your family business both internally and externally.

You might wonder what that means — because you think your company has just one value. In fact, it can have multiple values depending on the valuation standard used. The different results can help you determine whether to keep the family business, pass it on to the next generation or sell it to an outsider.

Two common standards used in valuing a family business are:

Many businesses will pay less federal income taxes in 2018 and beyond, thanks to the Tax Cuts and Jobs Act. And some will spend their tax savings on merging with or acquiring another business.

Before you jump on the M&A bandwagon, it's important to understand how your transaction will be taxed under current tax law.

Let's say divorcing spouses own part of the stock in a closely-held corporation. This may be one of their biggest marital assets, and often one spouse decides to buy out the other party's shares by transferring some assets in exchange for the stock. Before jumping headfirst into these transfers, it's important to consider the expected tax consequences.

What is the value of my business? That's the question every business owner wonders from time to time. But the correct answer varies depending on the purpose of the appraisal. Different rules and "standards of value" may apply in different circumstances.

There are a number of reasons you might want to determine the value of a business, including:

• Business planning,
• Potential sale or purchase of a business,
• Gift, estate and other tax purposes,
• Buy-sell agreements,
• Business litigation, including shareholder disputes and oppression cases,
• Marital dissolutions, and
• Financial reporting.

Here's a closer look at some of the common reasons to value your business.

When it comes to business valuations, not all valuation reports are created equal.

In fact, the professional standards for both the American Institute of Certified Public Accountants and National Association Of Certified Valuation Analysts specify two distinct types of valuation engagements: a calculation engagement and a valuation engagement.

While the reports produced by both engagements share many common characteristics, it is important for business owners to understand the key differences and appropriate uses with each engagement.

For closely-held businesses with multiple owners, it’s certainly a best practice to have a buy-sell agreement signed and in place.

A buy-sell agreement is a contract between the co-owners of a business which stipulates the terms and conditions for the buyout of an interest in the company should one of the owners need to leave. Simply put, the agreement acts as a sort of “pre-nup” between the owners that addresses the exit conditions in the event of an owner’s death, divorce, disability, personal bankruptcy or violation of a company contract or policy.

Whether you’re looking to buy a brewery, sell a brewery, gift some ownership to a partner or successor, or are just plain curious, the question of value is of primary concern. Ask any valuator worth their salt and he or she will tell you, valuation is an art, not a science.

There is no black and white formula for determining what a brewery is worth. However, there are time tested and generally accepted methods within which one can work to derive a fair value.

Buying another construction firm can be an attractive way to grow your company's revenue base. A merger or an acquisition can allow you to: 

• Add a new subcontracting specialty,
• Acquire an experienced labor force to reach new markets, and
• Deepen your penetration into the market your firm already serves.

Valuing an interest in a closely-held business is often more art than science. There is no perfect calculation or analysis that can always answer the question “What is it worth?”

While there are certainly subjective elements to any business valuation, there are three main approaches to valuation that are widely accepted and most often used by Certified Valuation Analysts (CVA) and other professionals that perform such services. These approaches are the asset or cost based approach, the income approach, and the market approach.

Let’s look at the pros and cons, as well as situations where their use is most appropriate.