Business Valuation

October 8, 2024

What a Formal Valuation Reveals About Your Closely Held Business

Effective strategic planning for the closely held business owner should begin with a formal valuation.
The information gathered and considered in a business appraisal provides insights into the business overlooked in day-to-day operations.
Valuation studies provide an insight into the potential value of the business and roadmap to to becoming a ‘best in class’ enterprise.

You own a business. You’re deeply familiar with your company’s day-to-day operations, challenges, and triumphs. You have invested your time, energy, and resources into its success.

You may have a rough estimate of what it is worth, guided by your years of experience, what you know of your industry, what you hear on the grapevine and your gut instincts. (Stastics tell us that more often than not, your beliefs are pretty inaccuate.) Money_Coin_Stack_On_White_Background_original_1746958-1024x683

Valuation: the First Step to a Successful Strategic Plan

The business owner who really wants to understand the value of a business and make informed decisions, you need an objective, data-driven analysis. This is where a formal business valuation is usually indispensable.

A formal valuation tells you the value today, of course. But to the the owners of the business, it is, or should be, much more than that number. A formal valuation conducted by a Certified Valuation Analyst (CVA) or other qualified professional is a full diagnostic exam for your business. It yields information you won’t get anywhere else.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

Here’s an example. A valuation focuses on comparisons to other similarly situation companies. Here is a snippet of analysis of key financial data from a calclulation report. It compares the performance of the company being valued with its competitors in the same industry in key areas using a percentage-based analysis.

RMA-Study-copy

A good, formal valuation drills down into a company’s financial and operational health, revealing insights that might otherwise remain hidden. This particular report tells us that this business is lagging on its ability to generate gross profits and that in other areas it is the middle of the pack.

Exceptional value in a business isn’t driven by mediocrity, and if and when the owners of this business try to find a buyer, these numbers will be reflected in a business that either cannot be sold or that is being sold at a much lower value than it could have brought.

September 23, 2024

Five Reasons Why Exit and Succession Planning is Not Optional

by Jay R. McDaniel, Esq.

The Need to Exit Our Closely Held Business is Non-negotiable. We all leave, eventually.
Exit and succession planning protects our business, our employees, and our families.
The effects of most business disasters are avoidable.

“Hope is not a strategy.” Vince Lombardi

If you own a business, you know that ‘winging it’” is not much of a business plan; it’s a recipe for disaster. Exit and succession planning isn’t a luxury; it’s a necessity. It’s not about if you’ll exit your business, but how and when. Lombardi during his career went from assistant coach at St. Cecilia’s High School in Englewood, New Jersey, to leading the Green Packers to two Superbowl victories. Lombardi always had a plan. He wasn’t talking about guiding a closely held business, but the thinking fits. And here is why.

1. The Inescapable Reality: The Grim Reaper is Undefeated

Let’s start with the cold, hard truth of mortality. No matter how invincible we feel today, there will come a time when we will no longer lead our business. We know that to be the truth. We are all leaving the job. Planning helps us avoid the potential that we leave feet first.

In much the same way, we know that we need the income from our business to support our lifestyle and the people that matter to us. Yet, if we are like most closely held business owners, we are all in on the company and the business is the largest single asset we own — in many cases, 75% of our net worth.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

We might envision a graceful retirement, maybe golden years on a beach somewhere. Or maybe from our status as entrepreneur emeritus, watching approvingly as the next generation carries on our legacy. It’s fuzzy and warm. But without a plan, the chances of that happening are like winning the lottery.

Without a well-defined exit plan, our business faces a chaotic and uncertain future. Our families and our employees, could be forced to make hasty, ill-informed decisions about the fate of the company.

March 3, 2024

Human Divorce, Meet Business Divorce

by Jay R. McDaniel, Esq.

Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.
An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.
The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

The divorcing couple that owns a business together has to manage the family and business relationships simultaneously. That typically involves terminating their relationship as well.

And if one of the parties owned the business before the marriage, such as a stake in a family business, it means dissecting the interests of the divorcing spouses in a way that may implicate the interests of still others.

portrait-of-a-confident-young-man-and-woman-workin-2023-11-27-05-08-51-utc-1024x683

Portrait of a confident young man and woman working together on a farm.

In a recent case before the Supreme Court in Montana, the issue was how to deal with a distribution of property when one of the sons of a ranching family was divorced from his wife after more than 30 years of marriage.

Business Divorce Issues Related to Divorcing Business Owners

The wife claimed an interest in the limited partnership that owned the ranch and argued that it should be valued for the purposes of the parties’ property settlement and not as a family business. The limited partnership vigorously disputed that she had any interest in the business.

Contact us for more information or to discuss your issue on business governance issues.

The case, In re Frost, relies on the liberal provisions of state law that provide that anything owned in whole or in part by the married individuals is distributable in a divorce. The trial court rejected the claim of ownership, but the award in some ways treated the rancher’s wife as if she had. Continue reading

July 10, 2023

Competition and the Value of a Business are Closely Tied

by Jay R. McDaniel, Esq.

Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.
Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.
As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.
Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.

Lawyers who are prohibited by the rules of professional ethics from any restriction on competition. A real estate management company where the principals each work their own book of business. A design-build firm in which a single principle generates the vast majority of the business. An outside sales organization in which the owners divide profits based on origination.

All of these examples raise the thorny issue of who owns the goodwill that is responsible for the future earnings capacity of the business. Does the reputation of the business belong to the business, or to the individuals? As one commentator put, does the goodwill of the business go home for dinner every night?

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

The issue of who owns the goodwill — the enterprise or the individuals— is likely to become even more important as the general sentiment is turning away from enforcing agreement not to compete and various states and federal agencies are taking steps restrict the imposition of agreements that restrict competition after employment. Continue reading

Effective strategic planning for the closely held business owner should begin with a formal valuation.

The information gathered and considered in a business appraisal provides insights into the business overlooked in day-to-day operations.

Valuation studies provide an insight into the potential value of the business and roadmap to to becoming a ‘best in class’ enterprise.

Valuation: the First Step to a Successful Strategic Plan

The Need to Exit Our Closely Held Business is Non-negotiable. We all leave, eventually.

Exit and succession planning protects our business, our employees, and our families.

The effects of most business disasters are avoidable.

1. The Inescapable Reality: The Grim Reaper is Undefeated

Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.

An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage. Courts may distribute the value of owner’s share to the non-owner spouse.

The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

Business Divorce Issues Related to Divorcing Business Owners

Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.

Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.

As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.

Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.