Businesses can be valued by agreement, such as by using the value set by the valuation firm utilized regularly by the business entity, if regular business valuation reporting is already in place.
Feinberg Sharma represents business owners and spouses of owners. When these assets are part of a divorce case, the business must be valued. Even non-marital businesses are valued so that the couple or court can determine a fair division of the marital estate, as a large non-marital asset will likely change the division of the marital estate to favor the party without a substantial non-marital estate.
Businesses can be valued by agreement, such as by using the value set by the valuation firm utilized regularly by the business entity, if regular business valuation reporting is already in place. It can be valued by a jointly selected appraiser, although this is not often the wisest choice, albeit a cheaper alternative to each side selecting their own appraiser. Utilizing the corporation’s CPA as the appraiser is also not a wise choice as the fairness of the resulting appraisal will be challenged due to the appearance of a lack of independence between the business owner and the CPA’s services being tethered to the resulting value. At FS, we like to work with the client to help you select your appraiser from those available. While all appraisers will tell you that the valuation methodology is similar from business to business, certain industries have their own appraisal means or the type of business is routinely sold through various brokers.
In all likelihood, these traditional business valuation methods will be examined when valuing your business: Asset; Market and Income approaches.
The Asset Approach calculates value by subtracting the liabilities from the assets. Assets include every type of possession – both tangible and intangible. Tangible assets are the computers, desks, chairs; phones; pens, paper, inventory, and anything resembling physical objects. The intangible items are accounts receivables, patents; knowledge, software, workforce in place and the like. Your appraiser will know what to look for in each business. Indeed, in this method and in all methods, the appraiser must examine any unrecorded assets or liabilities or any misuse of business funds and add back those items, if they exist, into the assets or cash flow of the business entity.
The Market Approach looks at your business and compares it to similar business that have been sold in the past. This is akin to the real estate method of appraising a property. There are various reporting services which appraisers subscribe to for comparison of various indicia of values of businesses. How closely the businesses in the reporting services relate to your business is always an issue worth examining.
The Income Approach is the most widely used appraisal method. It looks to historical information and formulas to predict expected cash flow and profits when calculating the enterprise value of the business. The Income Approach has sub-methodologies including the capitalized cash flow method; the discounted cash flow method and the excess cash flow method of valuation. The commonality of all are the determination of the future benefit stream and the rate of return or risk that the projected future economic benefits will be realized. There is a tremendous difference in value of two entities where one business had one customer which generates 90% of the income of that business versus the other entity which has 25 customers, none of which produce more than 10% of the gross receipts of the enterprise. This RISK to the first entity far exceeds that of the second – perhaps. This is but one of the issues to be examined by the appraiser.
Adjustments: Most business valuations contain adjustments for control premiums or discounts for lack of control; lack of marketability or impaired voting rights. In addition, adjustments must be made for non-recurring expenses and the discretionary expenses, such as owners’ compensation; perquisites; fringe benefits and employees that would not otherwise be employed except by this particular owner.
The issue of Good Will is also examined in the valuation process. In Illinois, good will is not part of the “enterprise” value and must be separated for the overall value of the entity. This is difficult when valuing professional practices or individually named institutions such as car dealerships and the like.
Due to our vast experience in representing business owners, the lawyers at Feinberg Sharma will prepare you for this process from the beginning of your case through to its conclusion. We want you well prepared for what will come.
© 2019 Joy M. Feinberg and Jessica L. Nelson for Feinberg Sharma, P.C.