Reviewing a Business Appraisal

Our February 2017 newsletter on Reviewing a Business Valuation summarizes the items we look for when valuing a business.  Key items include: Reason for the business appraisal, Standard of value, Qualifications and Experience of the business appraiser, Valuation methods considered, Documents reviewed and whether the appraiser interviewed management and toured the company’s location.  To learn more about this topic please see our February newsletter on Reviewing a Business Valuation.

Cash or Accrual Basis of Accounting?

Cash basis accounting and accrual basis accounting are competing methods of recording business transactions.  The cash method is generally used by small businesses to record revenues when cash is received and to record expenses when cash is paid.  Alternatively, the accrual method of accounting is used to record income when it is earned and to record expenses when they are incurred.  For many companies the difference between these methods is not significant.  While for other companies with large accrual items (such as large accounts receivable, work in process, etc. and large payables, or accrued liabilities) the differences between these two methods can be significant and affect decision making.  Please see our newsletter on this topic for more information.

Documents Needed to Value a Business

Documents needed to value a business include the last five years of tax returns, financial statements, depreciation schedules, accounts receivable aging listing, accounts payable aging listing and a listing of management’s compensation for the last five years.  Also needed are entity legal formation documents and documents affecting the ownership rights of the business’s owners.  After receiving this information we schedule a meeting with the owners to discuss this information and tour their business location.  Please see our May 2016 newsletter on documents need to value a business for more information.

Financial Projections

Reliable projections allow business appraisers to more accurately value a company’s future cash flows.  Good projections can measure a company’s growth prospects or its future decreasing profitability.  Often companies are overly optimistic about their future prospects.  This positive bias can lead to rosy projections that overstate revenues and understate expenses.  Past projections should be compared to actual results to see if there are projection biases.  Please see our Financial Projections newsletter for more information on this topic.

Unreported Income

Unreported income is difficult to quantify but can be estimated by analyzing a company’s bank statements, its expense records and also by analyzing the physical activities that are associated with a business’s revenues.  Please see our February newsletter on how to quantify unreported income.

Valuing Construction Companies

Valuing construction companies can be tricky because the construction industry is highly cyclical with many boom and bust cycles.  A successful construction company is good at accurately bidding projects, maintaining financial discipline during boom cycles and has a healthy backlog of construction projects.  A good reputation and a consistent marketing program are also important.  Please see our September 2015 newsletter on valuing construction companies for more information on this topic.

Valuing Restaurants

Restaurants are often started for the lifestyle they provide to the owner.  Restaurants are valued based on their assets and equipment and the cash flow they provide to the owners.  A profitable restaurant providing adequate compensation to the owner for their time as well as their investment is valuable in the market place.  Please see our April 2015 newsletter on Valuing Restaurants for more information.

Valuing a Software Company

Valuing a software company requires a thorough understanding of the Company’s past and a reasonable projection of its future cash flows. The costs incurred to create the software should be reviewed and understood. These historical costs are relevant if they reflect the cost of recreating the software today. Management’s experience running a software company should be closely reviewed and used to develop a realistic projection of the Company’s future revenues and expenses. For more information please see our newsletter on valuing a software company.

Calculating Self-Employment Income for Support Purposes

We often determine a self-employed person’s income for spousal and child support purposes.  By reviewing a company’s tax returns, financial statements, accounting general ledgers, bank and credit card statements, we can determine an owner’s cash and non-cash benefits for support purposes.  Please see our September 2014 newsletter on “Calculating Income Available for Support Purposes” for more information.

Our Business Appraisal Process & Fees

Please see our June 2014 Newsletter on Our Business Appraisal Process & Fees.  In the newsletter we outline our valuation process and our fees.  Generally, we request the last five years of tax returns and other documents before meeting with the Company’s management to tour their location and discuss their operations and financial information.  Based on this information, we can value the Company using the Cost, Income and Market valuation approaches and prepare a valuation report.  Our fees are generally $3,500 for a straight forward divorce valuation and $5,000 for an estate tax or gift tax valuation.  We generally ask for one-half of the fee upfront and for the balance upon completion.

Understanding Financial Statements

Financial statements or tax returns tell a story about a business.  They can tell the reader if a business is becoming stronger or weaker.  A strong business is able to increase its revenues and profits over time.  Increasing assets and decreasing debts can also indicate a business is growing stronger.  Most importantly you need to be able to trust the financial statements that are telling you the story.  Financial statements or tax returns prepared by a properly qualified outside party are more reliable.  Please see our February 2014 newsletter on “Understanding Financial Statements” for more information on the topic.

Finding Hidden Assets

Finding hidden assets can be a labor intensive journey requiring a thorough review of tax returns, insurance policies, credit reports, loan documents, etc. and the interviewing of individuals to find that needle in the haystack.  For more information on this topic see our November 2013 Newsletter on Finding Hidden Assets.

10 Most Common Business Valuation Errors

Valuing small family businesses accurately is easier if you have a good valuation process and avoid common mistakes created by taking short cuts.  A common mistake is to short cut the businesss appraisal process by failing to interview management and touring the Company’s facilities and seeing its equipment.  It is always a good idea to value a business using three valuation approaches such as the cost, income and market approaches rather than relying on one valuation method or a rule of thumb.  To read more about common business valuation errors please see the September 2013 newsletter on the 10 Most Common Business Valuation Errors.

Tracing Separate Property Assets in a Divorce

Often we help clients substantiate their separate property assets for California divorce purposes.  Our June 2013 newsletter on this topic outlines our approach to these projects.  Generally, to receive separate property in a divorce you first need to provide documentation showing you owned the asset before marriage, or you inherited them during the marriage and secondly you need to trace them from their original form (such as 100 shares of Apple) to their current form (such as cash, stock, real estate, etc.).  Without a document trail, assets are considered community property and divided.  Please see our newsletter for additional information on this topic.  Newsletter on Tracing Separate Property Assets in a Divorce.

Does the Business Really Need to Be Appraised?

Occasionally I receive phone calls from people asking me if it is worth having their business appraised.  I usually start by asking a few questions about the business:  What type of business is it?  How long has it been around?  How many employees does it have?  What equipment and assets does it own?  By raising some of the issues that might be involved, I try to walk you through what we may encounter as we move forward.  The difficulty lies in the fact that the value of the company cannot be determined until I review the company’s last five years of tax returns, its equipment listing, interview its management at their location, and write a report.

Unfortunately, it is not possible to value a business without going through these steps.  If we cut corners to value the company, it could come back to haunt everyone later and most likely at the worst time, such as a few days before trial or when you are in settlement negotiations.  I understand people just want a quick answer, but odds are if you are calling me you need a solid valuation to put an issue to rest.

Please call me if you have a valuation issue you would like to discuss.  I am happy to answer your questions and provide you professional advice.