Imagine a business where every new assignment is a unique case study in people, management, customers, risks, and rewards. In business valuation, no two companies are alike; nor do numbers and financial statements tell the whole story. Successful business valuators have to be detectives while sifting through the details of a company, and they need a diverse knowledge of finance, economics, law, marketing, and sales to do that. They must also be able to step back and see the big picture from the viewpoint of a buyer. It is this variety, and the intellectual challenges it provides, that makes business valuation both interesting and exciting.
It is a daunting challenge to find out how to get started in any new endeavor, and deciding to pursue business valuation is no exception. This guide aims to demystify the process by:
• teaching the concepts as well as the practical considerations one needs to be successful,
• filling the need and hunger for more how-to information, and
• sharing up-to-date valuation methodologies, case law, and trends so that one may be fully conversant with clients, the courts, and the IRS.
This guide also aims to help readers capitalize on the following demographic and societal forces that point to an increasing demand for valuation services.
Aging population. Over the next 15 to 20 years, a massive transfer of intergenerational wealth will take place. Companies will need to be sold, turned over to management, or have their ownership transitioned through succession or estate planning.
High divorce rates. High divorce rates are leading to a greater need for valuation services since the wealth in a closely held business is often the largest marital asset.
High growth rate of small businesses. Small business creation has accelerated, leading to more sales, shareholder disputes, estate planning needs—and valuations.
Increasing litigation. Increasing litigation due to divorces and estate taxation also fosters an increasing demand for business valuations.
IRS challenges and contract work. The IRS is taking an increasingly aggressive role in challenging estate and gift tax valuations, particularly those that are poorly prepared. The IRS is also accelerating its practice of contracting valuation work to outside practitioners.
The following two professions are increasingly involved in the business valuation field and can quickly benefit from a further understanding of its issues.
Certified Public Accountants (CPAs). CPAs are rapidly trying to diversify practice sources of revenues beyond traditional audit and tax services, which are now priced like commodities. They are moving quickly to provide a variety of consulting services, business valuation being one of them. While divorce valuations have traditionally been the focus of CPAs preparing business appraisals, the involvement of CPAs in valuations for other purposes is growing.
Attorneys. Attorneys increasingly need to understand business valuation methodologies and be able to critique valuation reports. In estate planning, business valuation is the issue, and attorneys cannot rely on the business valuator alone. In an estate or gift tax valuation dispute where large dollars are potentially at stake, attorneys must understand and be able to articulate valuation issues because usually they alone must meet with the IRS examiner or appeals officer. Similarly, family law attorneys must be able to articulate valuation concepts to successfully cross-examine an opposing valuation expert. In the corporate realm, an attorney’s clients have to grapple with valuation issues related to buy-sell agreements, shareholder disputes, mergers and acquisitions, and the establishment of employee stock ownership plans, to name just a few.