What Would a Willing Buyer Offer?  Would You Accept?

For most purposes, the value of your business is measured by what a willing buyer with sufficient information would offer and what you, with sufficient information, would accept. Trouble is, unless you’re actively selling your business, there aren’t many willing buyers with sufficient information hanging around at the times when you might want to ask them what they might offer.

There are many circumstances that call for a valuation. Exercising rights under a buy-sell agreement, making gifts to descendants or to charity, rights vesting under incentive agreements, complying with loan covenants, and sale transactions may require a valuation. Some not-so-pleasant reasons for a valuation include divorce, disagreement between partners, and audit. Chances are that you will experience one or more of these events. If that happens where might you turn for help?

It may not surprise you that valuation experts are often engaged by lawyers, not by their business-owner clients. You may be surprised to learn that valuation experts are real people. My real friend, Adam Newman, is one of those (not-mythical) experts and a Business Valuation Specialist at Crowe LLP.

Crowe is a top-ten audit, tax, and accounting firm, and Adam has been a real-life Business Valuation Specialist for 15 years. He is also a CPA and has been for 25 years, but he’s always been a real person.

Most of Adam’s client work is directly or indirectly related to financial reporting, including these kinds of engagements:Purchase Price Allocation – It’s important to allocate the purchase price in asset purchase and sale transactions between such things as goodwill, customer lists, trade names, equipment, inventory, and covenants not to compete.

• Purchase Price Allocation – It’s important to allocate the purchase price in asset purchase and sale transactions between such things as goodwill, customer lists, trade names, equipment, inventory, and covenants not to compete.

• Stock-Based Compensation – The value of equity-based instruments like shares or options is required for financial statements and for employee tax reporting.

• Estate Tax Reporting – What might it take to convince an IRS auditor about the value of a business when no transaction with a third-party purchaser takes place? Adam knows the answer to this question and provides convincing answers based on the facts and circumstances of the business and its owners.

In addition to the tasks that are primarily needed for financial and tax reporting, Adam also prepares valuations in these situations:

• Buy-Sell Agreements – Perhaps the most immediately meaningful valuations are performed on an annual or other regular basis and allow the parties to a buy-sell agreement to maintain realistic expectations before a buy-sell transaction is triggered, anticipate their funding needs, and make arrangements if a transaction is triggered under their agreement.

• Marital Dissolution – If the prospect of an audit isn’t bad enough, what might it take to convince a judge that a business isn’t worth the outrageous value a soon-to-be ex-spouse’s lawyer says the business is worth (the proceeds of which may go to pay his or her fee) when no transaction with a third-party purchaser takes place? Adam comes to the rescue in these sad circumstances, and he has testified about his independent and objective expert opinion of value often.

Before meeting Adam, clients usually have not had valuation on their radar. When a sale or merger transaction occurs or when an owner is granting equity to an employee as compensation or as an incentive, clients are rarely focused on how the valuation may affect their financial or tax reports. Most of Adam’s clients are rightly focused on the transaction and its effects, such as whether employees’ jobs may disappear, whether operations will change, and what lies in store for them after the transaction closing. Some of Adam’s clients have been focused on improving employee retention, others on grieving for a lost loved one. Adam is often engaged after a transaction has closed because the need for a valuation didn’t hit the client’s radar until the client was told by their auditors that a one is needed.

Especially when the valuation is being performed after a transaction has been completed, Adam points out that the client should be concerned with the valuation expert’s credentials and experience. “As a client, you’ll want to make sure that whoever is doing these purchase price allocations is going to pass muster with your auditors and tax preparers,” he said. “It’s not just a matter of us completing a valuation, signing a report, and being done with it,” he warned, “our report is always going to be scrutinized by auditors or tax specialists to make sure it’s going to hold water.” If you don’t start with a qualified and experienced valuation expert, this can be an expensive and time-consuming saga.

Adam observes, admitting to retaining bitter-sweet memories because of the clients’ circumstances, that he has lots of experience working with ‘business divorces.” When owners aren’t getting along, Adam’s team puts together convincing valuations to help the warring parties split-up the company or negotiate a buyout. “Usually, not everyone’s going to be happy,” he quipped, “but if everyone is equally unhappy, we’ve done our job well.” Adam’s goal in most of these circumstances is providing an accurate value, not building a case favoring one side.

Valuation can also be a disruptive and stressful process for the business and its employees, especially if it’s taking place during a period of change like during or after a merger or partner separation. Adam and his team are particularly focused on minimizing disruption and stress. They handle the complicated stuff and stay out of the way to let the business’ owners and employees focus on the business and weather change. Adam and his team know the things clients typically ask for and what auditors and tax preparers look for, and his team delivers valuation reports to satisfy both.

In the somewhat rare case when Adam is engaged with enough lead time, he helps determine how the proposed transaction will affect earnings. He helps the client answer the bottom-line question, “Should we complete this transaction?” He also helps figure out whether and, if so, how deal terms may need to change. Once those decisions are made, he helps analyze the impact the transaction will have on the financial and tax reports, how to prepare for the impact, and how to report it.

Adam recommends looking for a valuation provider with a combination of relevant experience and credentials. For example, if the valuation will be scrutinized by your auditor, look for someone with experience in dealing with auditors. If the value will be the subject of litigation, hire only an expert with experience with the court process and giving testimony. Adam, of course, has both. He says, “It’s a specialized world, and most clients need a specialist – not a jack of all trades.” A dedicated, full-time valuation specialist who’s not mixing in tax and other consulting work will usually lead to better results.

Adam says likes helping companies in complex matters for which they’re not equipped to handle internally. He says, “What we do is very much a blending of art and science – judgment coupled with technical expertise. We take complicated subjects and make them understandable.” Sounds just like a real person.

If you’d like to learn more or meet Adam, please reach out to me. I’d be honored to connect you.