By Boyce F. Lowery, CLU®, ChFC®
You’ve been working hard on your business spending countless hours dealing with all the challenges a business owner must face. Because of your hard work and diligence, your business may now be your most valuable asset, but do you really KNOW what your business is worth? Would you like to know?
There are lots of full service valuation firms in the marketplace who are more than willing to help you find out. However, because of the liability exposure these companies have for putting their name on a valuation report, the cost for a comprehensive valuation can be quite prohibitive. But now, you can get a business valuation report free of charge from Suncrest Advisors.
The only thing we ask in return is the opportunity to sit down with you to look at how we might be able to further benefit you and your company. There is no other obligation.
Why Would You Want A Business Valuation?
Our free business valuations are excellent for obtaining the information needed to:
- Get a good idea of value before deciding whether or not to put your business up for sale
- Determine value while working on a buy-sell agreement or considering the updating of your buy-sell agreement
- Consider estate planning needs
- See how the business is performing relative to others in the industry
Bear in mind that the valuation report we provide is not suitable to be used with the IRS or to take to your bank to secure potential financing. However, we work in conjunction with a group of very experienced valuation professionals who have recognized the need for accurate valuations without charging the fees that are generally necessary to cover the potential liabilities associated with a valuation being used for official business or tax matters. We have secured a retainer agreement with this firm to provide business valuations to our clients and we pay the full cost of that agreement.
About Business Valuation
In understanding and interpreting the value of a business, it is important to recognize that there are many different types and levels of value. The most common scenario involves the estimation of fair market value on a going concern basis for the entire company, e.g. a 100% interest in the subject equity or assets/enterprise.
When valuing the entire company (100% control interest), it is necessary to distinguish between the value of “assets” (asset deal) and the value of “equity” (stock deal). In practice, owner-operated businesses are either sold on an “asset sale basis” or on an “equity sale basis” with the purchase agreement reflecting the unique aspects of each scenario.
A variety of factors will determine the chosen mode of sale, with buyer and seller negotiating price and an array of other “terms and conditions” including the type of sale.
The “asset sale” value will always differ from the “stock sale” value due to the specific group of assets and liabilities that are included or excluded in each format. In determining which estimations of value are of most relevance to the business owner, the reason behind the valuation will typically address this question. Business brokers hired to assist buyers and owners most commonly value businesses under the “asset sale” scenario through multiples of discretionary earnings while valuations for divorce or estate taxes will be based primarily on the “equity sale” scenario.
The general differences between the asset and equity transaction structure are:
Asset Sale (Asset Value)
Includes ONLY inventory/supplies, fixed assets and all intangible assets. Excludes all liquid financial assets and all liabilities. Buyer operates from newly formed legal entity.
Equity Sale (Equity Value)
Includes the assets listed above PLUS liquid financial assets LESS all liabilities (ST/LT). Involves the full transfer of the legal entity including all account balances and current tax attributes.
Naturally, the “value” associated with these two distinct transactions can be substantially different. In practical terms:
Asset Sale: The seller keeps the cash and receivables but delivers the business free and clear of all debt.
Equity Sale: The buyer is acquiring ALL of the assets and liabilities, on and off the balance sheet.
In the “real world”, there are many variations on these basic structures, e.g. an asset sale might include accounts receivable or an equity sale might exclude long term debt, etc. They are both “fair market value on a going concern basis” estimates.
Enterprise Value
In middle-market transactions, it is also helpful to distinguish between “equity value” and “enterprise value”. Enterprise value is a reflection of the firm’s value as a functioning entity and it is helpful in that it facilitates the comparison of companies with varying levels of debt.
Which Business Value Conclusion is Most Important?
The answer to this question depends chiefly upon the purpose for the valuation engagement. If you are negotiating the sale/purchase of a business via an asset sale, then it is the asset value which is most relevant. If you are filing an estate/gift tax return, it is the equity value which is most important. When evaluating middle-market companies for M&A purposes, both equity and enterprise value will be useful. If your business is rapidly deteriorating and you are contemplating reorganization, then liquidation value may be of most relevance.
Key Performance Indicators
In the valuation report available to you, it will also cover a number of Key Performance Indicators, or KPIs. They are calculated based on an analysis of company-specific data and how that data relates to various industry-specific averages linked to millions of other businesses.
These KPIs are helpful in measuring financial and operational health and growth of a business. The report available to you will clearly show if your company is outperforming, underperforming or meeting industry standards.
Some of the KPIs included in the report include:
- Cash Flow to Revenue
- Cash-to Revenue
- Receivables (Conversion)
- Inventory-to-Revenue
- Fixed Assets-to-Revenue
- Total Debt-to-Revenue
- Receivables-to-Revenue (Pre-Tax)
- Inventory-to-Income (Pre-Tax)
- Fixed Assets-to-Income (Pre-Tax)
- Total Debt-to-Income (Pre-Tax)
Get Your Free Valuation
A business valuation can be very helpful to you for lots of reasons, even if it’s just to provide you with peace of mind. Simply call us at 888-827-0146 to arrange your appointment with Boyce Lowery and we will get started. We look forward to hearing from you.
About Boyce
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the owner of Suncrest Advisors, he aims to provide financial security and peace of mind to business owners, executives and professionals, and high net worth individuals across the United States. Along with more than four decades of experience, he is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.