ClarityBV Blog

Approaching ClarityBV’s first business anniversary, following are some reasons clients have worked with us during the past 12 months.

• Buy-Sell Agreement
• Charitable Donation
• Estate Reporting
• Gift Tax Reporting
• Management Buy-Out
• Marital Dissolution
• Purchase Price Allocation
• Succession Planning

Are there any common threads among these project types? I’d boil it down to two…

1. Serious money is on the line. In other words, the cost of an in-depth valuation analysis is small compared to the cost of using the “wrong” number.
2. Compliance. Auditors, taxing authorities, or others require a “qualified” appraisal.

In the first case, it is up to the business owner as to what type of analysis suits their needs. In the second case, someone (e.g. the IRS, an auditor, court of law, etc.) has made the decision for them.

Thanks to Steve Quick, Accounting Manager at Welch Packaging Group, for his kind words and recommendation on LinkedIn.

“Brian Alwine has been a valuable resource to Welch Packaging Group providing analysis, recommendations and expertise to support the development of valuation models used to support business acqusitions and gift tax reporting… Working with Brian Alwine has saved Welch Packaging Group thousands of dollars in audit and tax preparation fees…”  June 6, 2009

Business valuation is easy in theory. But, reality almost never cooperates.

For example, the concepts underlying the three main approaches to valuation are clear-cut.

Theory

• Asset Approach:
  • Assets – Liabilities = Value
• Income Approach:
  • Earnings / Risk = Value
• Market Approach:
  • Market Price / Market Earnings x Earnings = Value

Of course, the devil is in the details…

Reality

• Asset Approach:
  • Assets and liabilities missing
  • Items not recorded at market value
• Income Approach:
  • Past earnings fluctuations
  • Unpredictability of future earnings
  • Hidden expenses or income
  • Nonrecurring events
  • Income tax adjustments
  • Problems in determining risk rate
• Market Approach:
  • Difficulty of finding comparable market data, either public companies or private transactions
  • Effects of market booms or busts
  • Selection of multiples from ranges indicated

For the owner wanting a rough approximation of their business’ value, a simplistic application of the theory may be enough. The problem is in not knowing how far from the “true value” that simplistic calculation may be.

When money is on the line, the greater degree of confidence afforded by a comprehensive valuation analysis may pay for itself many times over. What would a 10%, 25% or 50% swing in value mean in facing the IRS, in a litigation matter, or a business acquisition or sale?

Are price and value synonymous? Does it matter?

I was prepared to write a wonderful, wordy post on the topic, until I realized the folks at VeraSage covered it much more succinctly with a pretty picture in a recent blog post…

Your Customers Earn a Profit from You Too

A similar concept is expressed in a quote by Warren Buffett. “Price is what you pay. Value is what you get.”