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Understanding the importance of business valuations
September 27, 2011
Akron, OhioSeptember 27, 2011 — The economy today drastically affects the manner in which organizations are acquired, sold, launched or closed. Countless businesses ranging from retail stores and manufacturing companies to technology resellers and home improvement distributors have closed many locations across the country. However, other businesses have been acquired by larger organizations seeking to capture more market share and increase their competitive advantage.
According to the Venture Capital Dispatch, large corporations such as Google, Cisco and Oracle bought up 50 venture-backed companies in 2009 alone — with a combined total of 248 companies purchased by those same organizations and other top-10 acquirers since 2000. And that’s just the top-tier — many organizations engage in mergers and acquisitions as part of their strategic plans.
With competitors aggressively gobbling up smaller organizations, the need for business leaders and owners to accurately valuate their organization is becoming more and more important. But business valuations go beyond buy–sell agreements or mergers and acquisitions.
Kevin Kettering of Winer+Bevilacqua, Inc., an accounting firm located in Akron, Ohio, encourages business owners to get their organization valuated for a variety of reasons, such as succession planning.
“As the population gets older, the need for succession planning becomes greater, and to do that, one needs a plan that includes an objective business valuation,” Kettering said. “It’s better to start that process early because business owners will be able to make good, unemotional decisions as to how their organization might be managed in the future.”
The need for a business valuation also extends into legal situations, such as divorce, estate planning, life insurance, ownership disputes and split-ups. In these scenarios, a reliable, defensible business valuation helps legal professionals and other advisers protect their clients’ interests.
“Business valuations in a legal context must be timely and efficient to save clients from emotional and financial expense,” Kettering said. “However, the numbers need to be precise so as to prevent any information from being susceptible to attack, and so that only one valuation is needed.”
Business valuations involve many steps but typically begin with research and data compilation. Information specific to the business and the event behind the need for the valuation must be gathered and analyzed so that the valuator has an understanding of the organization within the context of the industry.
This is followed by the accumulation of financial data, which is then compared to other industry businesses and adjusted to better reflect the organization’s true economic position. Afterward, future benefit streams are calculated, capitalization and discount rates are applied as well as any premiums, and a calculation of valuation methods is performed.
While different types of business valuations are available, valuators are often faced with rule of thumb scenarios in which clients believe the value of their organizations can be calculated via a simple ratio, such as two or three times the annual revenue. Kettering takes a strong stance against rules of thumb.
“When organizations think their business can be valuated using rules of thumb, I typically tell them that rules of thumb imply their organization is the same as the average companies in their industry — which might be true and might not,” Kettering said. “However, not all businesses in a particular industry are going to be the same. Some might have more debt and others might depreciate their assets more slowly.”
Kettering also stated that courts, insurance companies and the IRS do not accept rule of thumb valuations. Combined with the ongoing rise and fall of organizations’ marketplace value, this further increases the need for business owners and leaders to engage a qualified professional for their valuation needs and get a solid understanding of their organization’s true worth.
Kettering is a Certified Valuation Analyst (CVA) trained by the National Association of Certified Valuators and Analysts (NACVA). He became a CPA in 1997, has performed business valuations for organizations since 2005 and has supported organizations’ tax needs since 1992.
About Winer+Bevilacqua, Inc.
Winer+Bevilacqua is a proactive CPA firm in Northeastern Ohio with 30+ years serving a variety of organizations through specialties in tax and accounting, information technology services, retirement plan services and business valuations. Winer+Bevilacqua “pluses” its clients’ businesses by minimizing tax burdens, providing options for management decision-making, streamlining IT, enhancing net cash and eliminating unwanted surprises.
By assuring nothing less than an absolute commitment to responsive, efficient and ongoing financial guidance, Winer+Bevilacqua “pluses” business owners’ ability to manage their organizations through options and sound financial strategies as well as their ability to act upon the story their numbers tell.
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