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You Built It, Now What?s It Worth?

Determining the true value of a business involves more than simple arithmeticFocus | Accounting

Do you know what your company is worth? A hands-on business owner might think he or she does, but what happens when it?s time to set a value for estate taxes or a possible sale? Just add net assets to annual cash flow, right?
Here?s advice for those who think determining the market value of a company is simple math: Put down that calculator, take a timeout and let some experts save you from a costly mistake.
?Laymen think that we throw some numbers into a computer and out comes the value,? says Jeffrey Urbach, founding partner with accounting firm Urbach & Avraham in Highland Park. ?The math is just the easy part.?
Valuing a business is even harder when it?s big. Last week telecom giant Verizon won a tug of war with Qwest for MCI and the size of the offer was not the deciding factor. MCI?s board, basing its decision on an assessment of which suitor had better prospects, accepted Verizon?s final $8.5 billion offer?in spite of a $9.8 billion offer from Qwest.
?From the standpoint of risk versus reward, Verizon?s revised offer presents MCI with a stronger, superior choice,? said MCI Chairman Nicholas Katzenbach in a statement.
?Keep in mind value is in the eye of the beholder,? says John Ferro, Northeast practice leader for Grant Thornton?s Economic Advisory Services Group in New York City. ?One person may be able to bid a higher price for perceived synergies or other benefits the transaction brings versus another bidder who isn?t in the same position.?
Determining a business? value usually coincides with some event or milestone. ?If you have an ongoing business or professional practice and there is no death in the family or divorce and you are not interested in selling, you generally are not going to go out there and have your business valued for the heck of it,? says Urbach. Fees for the service, which Urbach says start at $5,000 and rise depending on the size of the company, tend to deter casual inquiries.
?It might be done for estate-planning purposes,? says Ferro. ?It could be required with the potential sale or merger of the business, or it could also be in connection with a desire to raise additional capital or to potentially go public on the stock exchange.? Various stock plans, like employee stock-option programs, may require periodic business valuation, he adds.
The business-valuation process is arduous?even for the experts. Intangible elements not found on the company?s balance sheets must be taken into consideration. ?It?s the intellectual ability to gather and analyze data about that company and where it fits in [with] its industry to ultimately try and determine value,? says Urbach. ?That?s the real challenge.?
Urbach typically asks clients for at least five years of financial statements and tax returns for the number-crunching aspect of the process. ?We will, where possible, do a site visit, interview the owner and key managers of the business,? he says. ?You really should not be valuing something in the abstract.?
Thorough business-valuation experts will immerse themselves in the client company?s specific niche. ?If I am valuing a medical practice and that practice is an OB-GYN practice, then I?ve got to do focused research to see what is happening not only in the overall medical field but what is happening in OB-GYN,? says Urbach.
The process is particularly difficult with fledgling companies. ?One of the most difficult things to value is a startup company,? says Urbach. Similarly, specialized niche companies that defy description can limit an expert?s ability to refer to a broader marketplace for comparison with other businesses that have been sold. ?You have no history to go on and basically you are gazing into a crystal ball,? Urbach says.
Market, macro and microeconomic research are all part of the drill, as is determining where the company stands in the market compared with its peers. ?We have to assess the competitive environment,? says Urbach. ?We will ask the owner ?Who are your five largest competitors, where do you fit in that pecking order and how much trouble are they giving you???
It is also critical to know what makes the company unique and marketable, says Ferro. ?Some of that might be about understanding existing relationships, intellectual property and patent agreements.?

Choosing the right professional to help can be tricky, Urbach says, as more accountants are moving into the field. ?This is one of the fastest-growing niches among accounting practices today,? he says.
But not every accountant has the right training or experience. Urbach cautions that business valuation is a task for seasoned advisors with knowledge of different industries.
?Unlike traditional accounting work, you need more senior people to do the work. This is not the kind of work that is delegated down to lower-level staff,? he says. ?You need someone with a broad range of experience who has dealt with various business owners and can make some important judgment calls.?
Accountants are not the only ones working this field. Real estate appraisers, for example, offer services that are related to business valuation. ?There are many different types of individuals involved,? says Ferro. ?You might be an investment banker that is well trained in valuing businesses.? While there is no requirement for it, Ferro suggests hiring individuals with professionial certification. Urbach agrees, saying, ?Make sure the person you retain has one if not more credentials from one of the major agencies.?
These include The National Association of Certified Valuation Analysts in Salt Lake City, which issues a ?certified valuation analyst? credential to accountants and business advisors. The American Institute of Certified Public Accountants and The Institute of Business Appraisers issue similar credentials.
Whatever initials follow the consultant?s name, ?It is important that your advisors have deep financial-analysis capabilities,? says Ferro, ?understanding the tax regulations as well as [having] an ability to analyze a business? true strengths, weaknesses and abilities.?
Using these resources to find the right business-valuation advisor is vital to get the most out of any transaction. ?The risk by not having some kind of advisor is that owners will underprice their business,? says Urbach.
email jpruth@njbiz.com

KEEP IN MIND
Stock-Option Programs Getting employees vested in the company through an employee stock-ownership plan can provide motivation. But staffers will need to know what the business is worth to keep them interested in owning part of it.

Getting Divorced The business may get pulled into the courtroom as a marital asset. How much the company is worth can make a dramatic difference in
the final settlement.

Estate Planning You can?t take it with you?even if you built the business from the ground up?and the company will hold more
than sentimental value for your beneficiaries. Establishing its
worth can make choosing how to pass it on to the next generation less complicated.

Raising Capital Whether you seek funding through a private placement of stock or an IPO,
a business valuation will be
necessary.

Selling the Store Who wants to sell something they?ve slaved over for less than it?s worth?
Having an expert review and
assess the potential of the
company can raise the sale price significantly.
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