Tag Archives: valuation

How to Understand Valuation Reports

Most owners of small businesses, many executives/owners of medium businesses and even quite a few executives/shareholders of large businesses think the most important aspect of a business appraisal is the final number. The business is worth X dollars.

Obviously, the dollar amount is important. Getting the right dollar amount is even more important (I make this distinction because, in my experience, some business owners/executives and even quite a few bankers do not understand or sometimes even care about the difference between A Number and the Right Number). However, the number is arguably, especially if contested, only half of the requirement.

Depending on the reason for the business being appraised, the actual valuation report MUST meet specific parameters. If the report does not meet these parameters, the value arrived upon by the appraiser may be found meaningless or an opportunity to litigate by tax authorities or plaintiff attorneys. Just arriving at a reasonable number is completely inadequate if the report parameters are missing. It is kind of like buying the wrong insurance policy. The coverage amount might be right, but coverage may not exist because the policy is wrong.

Matching the correct report with the need is vital. Not knowing or understanding the difference makes business owners vulnerable to con jobs. And many business owners are conned each and every year.

How to Avoid Being Conned
First, I advise hiring an accredited business appraiser. All accredited business appraisers must sign a code of ethics, and most believe in their code. Some, though, do not quite believe in ethics as much as others. Some run the same con, but with accreditation. To be fair, I think some complete their reports mistakenly because they do not know any better. They are like insurance people with credentials who can barely spell insurance, much less business income coverage.

The better path is to understand the three basic types of Fair Market Value reports and to also understand the huge difference between Fair Market Value (FMV) and Fair Value (FV). FMV and FV are not synonymous. I have seen agency owners, and even accountants and attorneys treat these critical terms as if their meaning was the same. However, many courts treat the values calculated using these two terms quite differently.

See also: 3 Myths That Inhibit Innovation (Part 3)  

Relative to the three types of valuation reports (there are other types that are generally less applicable to most agency owners that I won’t address here), generally there is (exact terms vary depending on the professional association standards to which the appraiser is credentialed or belongs and sometimes depending upon the court, if being litigated):

  1. Summary reports, which are often referred to as letter reports (the entire valuation is in the form of a letter) or short-form reports. These reports contain little detail.
  1. Informal or Calculation Reports. The report writing standard, the analysis, the degree of confidence that applies to these reports are all relatively low. The margin of error is relatively high. The cost of these reports should therefore be relatively low. These reports rarely discuss the applicability of different valuation methods.
  1. Detailed, Written Reports. As the name implies, these are highly detailed reports usually combined with considerable analysis and a thorough discussion of the applicable valuation standards. These should cost the most, all else being equal.

Do not confuse a low price with high quality. Some appraisers charge a stiff penny for lower-quality reports because the customer does not understand the relatively low quality. Customers tend to think the appraiser just charges less. They think they are getting a Cadillac for the price of a Chevy. They are really just getting a Chevy that might not even be new.

The con occurs when appraisers fail to offer clients options, especially the most rigorous option, and clients do not know they are comparing apples with oranges when one proposal is for a lightweight appraisal and the other proposal is for a high-quality, heavy weight appraisal. One cannot always tell by the price, either, because the con is to charge as if the lightweight appraisal will be of high quality but just enough less money to get the job.

Courts have recognized this problem to some extent. For specific purposes, especially estate taxes, the courts can actually penalize the appraiser. For most purposes, though, once the valuation contract is signed, the damages will fall on the client and not the appraiser.

I am not suggesting all reports need to meet the highest standard, because they do not. When someone truly needs a decent, back-of-the-envelope valuation that has a large margin of error that is acceptable to all parties, a low-standard report should suffice. If litigation, a sale, taxes or compensation are directly tied to the value, then usually the best option is to spend the money and obtain a high-quality valuation right from the get go. Having a low-quality report in the hopes that everyone will agree can only complicate the situation if a high-quality report is eventually required. Then one may find it necessary to explain all the factors the low-quality appraisal inadequately addressed.

My key point, though, is that it pays to understand some basic valuation differences. It pays to understand that a low-quality report has severely limited acceptable uses, including that one cannot easily dispute the resulting value because the margin of error is so acceptably high. If the calculated value is $1,000,000 plus or minus 50%, then any value between $500,000 and $1,500,000 is okay.

See also: 5 Ways Data Allows for Value-Based Care  

These are not easy differences for the uninitiated to understand, either. My short summary is a summary of thousands of pages of textbook differentiation. Sometimes, especially when the attorneys and accountants involved do not understand the differences, I think clients should consider hiring someone to just explain their valuation report options. The complexity goes far beyond getting a home appraised, and choosing the wrong standards rarely is beneficial to any party other than the attorneys involved.

You can find the article originally published here.

Should You Sell the Business — or Not?

If you’re thinking about selling your business, try not to make it a hasty decision. Take a step back and consider all of your options. Details like, if you should sell, if you should sell right now and what you need to consider before selling are just a few of the considerations to make before reaching a final decision.

So, is it time to sell your business? Here are some of those important questions to ask yourself to help figure out:

Is my business ready to sell?

Most businesses need at least two years of preparation before being listed on the market. This is to make sure your books are in order, tax returns are organized and the company is presented in its best condition to potential buyers. Trying to do these things in the month before you sell could reduce the selling price of your company or compromise the sale altogether.

How much is my business worth?

Many business owners wait too long before deciding to sell. Businesses should be sold before their technologies are outdated or they suffer a decrease in sales. It’s important to sell while operations are still strong, to get the best valuation.

What are the current market conditions?

Before deciding to sell, take a look at the market conditions for your industry. You may want to sell immediately, or you may wait out what you hope is a dip in the market so you can get a higher return a few years down the road. In 2006, for example, a carpentry company would have sold for three to four times as much as it would have after the financial crisis. Sometimes, even if your business is prepared for sale and with a good valuation, market conditions force you to rethink your plans.

Can I cope with the changes?

As a business owner, you have most likely poured yourself into your job. If you sell, are you personally prepared for the transition from business owner to the next opportunity on your horizon? This decision is primarily personal but is an important factor to consider in whether you should stay or go.

Am I willing to stay on if the buyer wants me to?

Sometimes, to ease the transition between owners, new buyers ask that the previous owners stay on in a consulting role for a predetermined amount of time, usually six months to a year. Having the prior owner stick around can help avoid any dips in business during the transition. For you, however, is it worth it? You should figure that out ahead of time so you don’t fold under pressure conditions when you just want to close the deal.

What are your deal breakers?

Would you consider alternatives to a cash sale? Who gets the rights of intellectual property created during your time at the company? Will the new owner keep your current employees? These are all questions to consider sooner rather than later so they can be resolved before you’re near a deal.

Ultimately, one of the best investments you can make when considering the sale of your business is to build a team of trusted advisers. Accountants, attorneys and insurance agents are just a few of the specialists who can be supremely helpful. These professionals have an understanding of each moving part and, more importantly, of how they all play together.

A successful exit or transition strategy takes preparation and a wealth of time. It involves taking inventory of all aspects of your business and personal life to form an integrated strategic plan.

After considering all of the questions, it’s time to come to a decision about whether the timing is right to maintain or sell your business. No matter what decision you come to, remember that preparation is the key to taking a successful step into the future.

A Technology Breakthrough for Valuing Tangible Assets

What are your clients’ tangible assets worth? If you are like most advisors, you don’t have a clear answer. Without that clarity, you are leaving yourself and your clients at risk. Tangible assets – valuables ranging from fine art and wine to classic cars and jewelry – make up an ever-increasing portion of household wealth. Yet there is little visibility into this asset class.

Why? Often, individuals find the process of documenting, tracking and managing the values of tangible assets to be tedious. Instead of producing a thorough inventory, the insured may opt for a blanket umbrella policy that covers general contents as a percentage of the home’s value. The individual may list certain items, but with inadequate documentation. Many times, both the insured and the insurer fail to keep up as the market value of collections changes.

Fortunately, technology has emerged that makes collecting and managing information about tangible assets significantly easier. Appraisers can collect detailed data and provenance on property and possessions and upload them to a personal, online digital locker, where the items are regularly valued, securely managed, and are accessible anytime. Individuals will soon be able to use their smartphones to take a picture of a valuable object and upload it directly to this locker. As items are added and values change, the owner is notified – and can choose to automatically alert his advisors, including insurers and wealth managers, to ensure the items are accounted for and adequately protected.

The continuous transparency that the locker provides into values can be eye-opening to users.  Case in point: A family in the Northeast has a large, valuable art collection. Thirty years ago, the family had the pieces insured, using estate values provided by auction houses. These values, as a rule, are much lower than retail replacement values, so the family’s collection was initially insured at about half of what it should have been. The collection had not been appraised since the early 1980s, and, when a wealth manager had it re-appraised in 2012, values had changed so substantially that a piece initially valued at several hundred thousand dollars now carries a fair market value of more than $50 million.

The consequences of this type of undervaluation are significant. Had the owner passed away before the revaluation, the estate could have suffered an immense tax bill. In the event of loss, theft, fire or water damage, the owner would have been severely underinsured and faced significant loss. In addition, had the owners known the higher value of the artwork, they could have sold or leveraged it.

The bottom line is: With more information about their valuables, individuals  – and their advisors – can make more informed decisions.

This ability to capture, securely store and provide real-time valuations is a momentous step forward in tangible wealth management, and has been made possible by several technological advancements:

1. Data About Prized Possessions
There is a massive amount of data now available on luxury items. Whether a person’s passion investment is wine, diamonds, classic automobiles or fine art, there is a database that captures the real-time value changes in the category. By using technology to process that data, individuals gain a better composite view of their wealth, a greater idea of potential liquidity options, and a more accurate way to assess risk.

2. Digital Collection — Onsite and at Retail
In the not-so-distant past, a person had to take pictures or videos and store them on a hard drive, keep receipts in a safe deposit box, and use a spreadsheet to capture information on valuables. Now that all communication and record keeping has gone digital, certified appraisers can use apps to capture all of this information on-site. Merchants can email electronic receipts. Individuals can snap a picture of any acquired item, add support information like a receipt, package art, or bar or QR-code and send it to their personal digital locker in real time. All of this information is securely accessible anytime, anywhere.

3. Cloud Storage and Connectivity
Once information is collected electronically, it can be safely and securely stored in a personal digital locker in the cloud. This eliminates the need for paper records or other media that can be lost, stolen, or destroyed.  In addition to storage, the cloud provides connectivity, creating a virtual ecosystem where individuals can privately view the value of their tangible assets and manage those assets. This new capability includes easy connections to on-line auction houses, dealers, insurers, wealth manager and the like to sell, insure, donate, or take other beneficial actions powered by information about everything a person owns.

Ultimately, data is currency, and new technology is helping individuals cash in on the data about their tangible wealth. The information about possessions has inherent value. By adopting emerging technologies to collect, value and connect the information about individuals’ personal property, individuals and their advisors can finally gain transparency into tangible assets – completing the total wealth picture.