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What’s on the radar of the business valuations community

November 24, 2014

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When it comes time to sell your business, will you be ready? As an owner, you’ve spent countless hours building up the strength of your venture, and all that hard work can now be rewarded with a seamless and successful sale. In order to realize the full potential of your deal, however, you must dedicate time to a comprehensive business valuation.

This process will let you know how much your company is really worth, taking into account your entire financial situation – so you can present your venture with as accurate a picture as possible at that time. Naturally, this is a major positive during a sale, mergers and acquisitions, litigation and other key moments during the life of your business. Learning how much your company is worth is an important question you should be asking, but the answer can change depending on conditions across the country.

With that in mind, you need to be aware of the current trends affecting business valuations, so you know how your venture will be analyzed. This will not only help you avoid selling for less than what your business is worth, but it will also ensure you avoid common misconceptions, misunderstandings and other pitfalls that can follow you while valuing your venture.

Numerous factors impact business valuations

The process of determining the current value of your business has its share of subtle nuances. That can make things a bit more complicated, but working with trusted advisors will remove that risk and ensure you have a comprehensive picture of your company. At Clark Schaefer Hackett, we have a team dedicated to business valuations who know what you need during this process. We focus on creating working relationships and learning about your venture, so we can help you during this time by providing a detailed, customized report on your financial health.

The business valuation industry can be affected by a number of changes across the country, from the economy itself to preferences among the valuator community. Staying up-to-date with these trends will help you understand how your business will be analyzed and get the most out of the process at the same time.

At the moment, there are several key issues affecting business valuations. These include:

  1. Stock vs. asset sale
  2. Implied Private Company Pricing Line model (IPCPL)
  3. Pass-through entities
  4. Goodwill

1. Stock vs. asset sale

One of the first steps on your path toward a successful sale is the analysis of what is actually being sold. Most sales are broken into two options: stock purchase or asset purchase. It is important that you determine which option your sale falls under, and which option is best for your business.

  • Stock purchase – A stock purchase is when your company’s stock is sold to a buyer. This transaction will also transfer legal ownership. A stock purchase removes many of your assets from the equation – and this can be better for the seller for several reasons. You can tax the sale at a lower capital gains rate and you can be quickly absolved of ownership duties.
  • Asset purchase – An asset purchase is the more popular of the two options. In this type of transaction, buyers acquire¬†individual assets from your business while you remain the owner of the legal entity. This transaction has more tax-favorable options for buyers depending on the type and depreciable life of your assets. It can also lead to improved cash flow.

Before you move forward with either option, analyze your assets and other elements of your business to determine the best course of action.

2. IPCPL

Another important issue affecting the business valuation community today is the Implied Private Company Pricing Line model, or IPCPL. When currently valuing a business, professionals start at a high level by looking at stock markets, then move down to a more specific level for the company. This doesn’t make a lot of sense for small businesses, and instead it is better to take a different approach when analyzing transactions for these types of companies.

The IPCPL was developed to solve some of the inaccuracies of current valuation methods. Without IPCPL, valuators can use data from publicly traded securities to gauge privately held small businesses. The end result could be wildly different figures – a serious problem for a sale. Instead, IPCPL takes the aggregate of 500 private firms’ completed transactions to remove room for error, address the effects of liquidity, and deal with other tax adjustment issues.

If the IPCPL proves effective and popular among valuators, it could improve the quality of business valuations for smaller companies.

3. Pass-through entities

One more critical component of business valuations is the structure of the company in question. Your venture has multiple options when it comes to your corporate structure. Some of the most common today are the limited liability company, or LLC, the S corporation or the C corporation. The first two – LLCs and S corporations – are considered pass-through entities.

Pass-through entities have unique tax benefits and structures compared to a regular C corporation. As a result, using data from a publicly held C corporation to value a privately held pass-through entity may be inaccurate, for example. Once, this was a common practice in the industry, but now valuators are realizing that pass-through entities have to be looked at in a different way.

Clark Schaefer Hackett is on the cutting edge of this trend. When you go to sell your pass-through entity, make sure your valuators fully understand the tax benefits of your business.

4. Goodwill

Finally, one more important consideration during your sale is goodwill. Many times Goodwill is the difference between the current market value of tangible assets and the total value of your business. The value of goodwill and the other intangible assets is determined when recording the opening balance sheet.

Privately held companies have new options in terms of goodwill. For instance, they may now amortize goodwill rather than test it annually for impairment. How you approach goodwill can have an effect on your financial statements, and we can assist in the dialog to determine if you should amortize or test moving forward.

How you treat goodwill can make a significant difference in the future income reported for your business.

Work with the right advisors

Alterations in the business valuation environment could directly impact your company in the near future. As a result, you should be in contact with auditors, financial advisors and other professionals now so you are aware of potential changes. Working with advisors can help you navigate a sale, merger or other transaction where your value comes into play, and it will help you get the most out of the deal and avoid potential problems down the line.

Who you consult at this time must be on top of these trends in the business valuation industry. At Clark Schaefer Hackett, our experts are closely watching the changes with pass-through entities, goodwill, the IPCPL model and other developments. Therefore, we can make sure the value of your business is as accurate as possible.

Once consulted, we will sit down with you to develop a working relationship where our experts can gauge your business and determine the best course of action. We take all factors into consideration, so our technical service and expertise leads to a comprehensive financial picture of your company. Contact us today to learn more.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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