We Value Businesses
Since inception, HP Accounting has served the business community with a comprehensive range of professional services. Thoroughly attuned to the issues and challenges facing today’s business owners, we anticipate the needs and provide timely, accurate advice and services tailored to a particular situation. We have a team of experts to provide business valuation services as follows:
- Business valuation experts
- Accountants (CPAs)
- Business brokers
- Commercial real estate appraisers
- Investment bankers
Each group of professionals brings something different to the practice of business valuation. Each group has its own advantages and disadvantages. Business valuation experts are generally better educated in business valuation and usually have superior accounting skills. Business brokers have a superior knowledge of the market. Accountants (CPAs) have several advantages in rendering business valuation services and they are educated in financial concepts and terminology so can explain them to you in a simplified form. A strong understanding of Finance is extremely beneficial as well.
We uniquely combine the advantages of all of the above with our knowledge and academic education in valuation, accounting, and brokerage. Furthermore, the firm has direct access to the resources of mergers & acquisitions firms and business brokers, which enables us to assist our clients with superior market knowledge. HP Accounting is also affiliated with commercial lending firms that provide financing. Thus, we are able to assist clients who are looking for selling or acquisition opportunities.
What is the business appraisal?
A business valuation is an opinion of the fair market value of a business (or portion of a business). It assesses a variety of factors to determine the fair market value in sale.
Fair market value is the price at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, neither of whom are under any compulsion to buy or sell, with both having reasonable knowledge of relevant facts.
Why have business appraisals?
Business valuations are performed for a variety of reasons. Some valuations are required such as in when business ownership interest is gifted or transferred as part of an estate, or in the cases of estate taxes or marital dissolution, while others arise from the desire to identify a value, such as a basis for a business purchase or sale. The primary purpose of business valuation is preparing a company for sale. Regardless of the reasons, it is crucial to have a business valued by a business valuation expert who is proficient not just in analysing the financial statements but also who has an understanding in converting those accounting numbers into estimates of future performance, which ultimately create the basis for value in today’s dollars.
The most common reasons why a business may need to be appraised are:
- Buying or Selling a Business
- Marital Dissolution (Divorce)
- Estate Planning for Gifts or Inheritance
- Family Limited Partnerships or Limited Liability Companies
- Employee Stock Ownership Plans (ESOPs)
- Litigation Issues involving Lost Profits or Economic Damages
- Stockholder Disputes
- Insurance claims
- Intangible impairment testing
- Mergers & Acquisitions, Reorganizations, Liquidations, and Bankruptcy
- Charitable contributions
- Allocation of purchase price
- Buy-Sell Agreement
Another tool that helps in valuation of your business is business valuation calculator. It is of immense help especially in valuation of small businesses. If you are a buyer, the business valuation calculator will tell you whether the business you want to purchase is in the realm of affordability and if you are a seller, the calculator is a reality check. It provides you an estimation of what price you can charge if you want to attract potential buyers.
Business Appraisal Techniques
The most common types of valuations & reports typically issued are described below:
Different Types of Valuations (Development):
Complete Valuation: A valuation is a procedure of determining the value of a business or business ownership interest. The purpose of the complete valuation is to express a definite opinion of value. In a Complete Valuation, various different methods of valuation are used that are relevant to the business type. This type of valuation is done in the case, if a valuation has the potential to go to court and if the valuation needs to be reviewed by others, such as the IRS for tax purposes.
Limited Valuation: The aim of a limited valuation is to articulate an estimation of business value or business ownership interest, which lacks the performance of additional procedures required for a complete valuation. Business valuation consultants conduct only limited procedures to collect and analyse the information, which the appraiser considers necessary to support the conclusion presented. This type of valuation is suitable for few events such as when the case is not going to the court; for instance, to help with structuring a buy-sell agreement between two partners.
Valuation Calculations: The objective of business valuation calculations is to provide an approximate sign of businesses net worth based upon the performance of limited procedures settled upon by the consultant and the client.
Different Types of Reports (Communication):
Comprehensive Report: This report is known as a formal report or self-contained report. The comprehensive report is the highest-level report that can be provided to a client. The comprehensive valuation report describes the valuation procedures and the reasoning that supports the analysis, opinions, and conclusions in detail. This type of report is recommended if a valuation has the potential to go to the court. Also, in case if the report needs to be reviewed by others, such as the IRS for tax implications. Comprehensive report best explains what methods are used and how the business value was derived. A comprehensive report can range from 30 to over 100 pages.
Summary Report: This report is known by other names such as an informal report or letter report. It contains significantly less information than a comprehensive or formal report. Most of the description is excluded and many sections are briefly explained. As the name applies, the summary report just abridges the valuation procedures and the reasoning that supports the analysis, opinions and conclusions. The summary report is worthy in certain situations where the user of the report is informed that great part of the detail is excluded from the report. This kind of report may be used for planning purposes. A summary report can range from 5 to 25 pages. An opinion is not expressed herein.
Restrictive Use Report: A restrictive use report just states the valuation procedures and opinion of value. It is even shorter than a letter report and generally, the reference is made to all of the work that has been done, including the fact that the working papers contain all of the supporting documentation for the appraiser’s opinion. A restrictive use report is confined to the client as the only user of the report. This type of report can range from one paragraph to several pages and an opinion is not expressed.
Oral Report: This type of report can range anything from a quick phone call to lengthy meetings. Some attorneys prefer oral reports in litigation. However, even though oral reports are acceptable, they are not advisable.
Review of a Valuation: A valuation review is an opinion about the quality of a report issued by another appraiser. A letter depicting the survey and investigate is commonly issued.
The valuation section is the most important part of the report which discusses the different valuation approaches and methods.
It determines the value indicative of a business usually for the purposes of insurance coverage or for the sale or purchase of the business using one or more valuation methods.
- Asset Approach
- Income Approach
- Market Approach
The Asset Approach – It is also known as the cost method and in this, we seek to measure value through the calculation of assets net of liabilities. One can use book or market values of assets in this approach and is significant for a business that is closed down and being liquidated.
The Income Approach – In this approach, HP Accounting seek to measure the income generated by the business through its operation. Here the appraisal utilises information and technique from accounting and financing.
The Market Approach – In this approach, HP Accounting seeks to measure business value through comparison. The subject company is compared to other businesses or business interests that have sold. This type of valuation focuses on the comparative transaction method and appraises competitive sales of comparable businesses.
Commonly Used Business Appraisal Method
Adjusted Net Book Value Method
The most commonly used strategy within the asset approach is called the Adjusted Net Book Value Method or Asset Valuation Method. In this strategy, all assets and liabilities are adjusted to their fair market values, which may be a going concern value or liquidating value, depending on which is more appropriate in the context of the valuation. The fair market value of stockholder equity is then calculated by subtracting the equitable value of the liabilities from the fair market value of assets. This method generally is applicable as the primary valuation approach for two types of businesses: (a) those about to be liquidated, and (b) holding companies whose operating companies are publicly traded.
The major shortcoming of this strategy is that it is ineffective in accounting for unidentified intangible assets but not limited to goodwill and assembled workforce value. Therefore to the extent that these assets are missing from a fair market value Balance Sheet, the Adjusted Net Book Value estimate of fair market value will be too low. In addition to this, it is not always economically practical to calculate the fair market value of every asset and liability, which introduced additional valuation error into this method.
Discounted Future Cash flow (DCF) Method
Within the income approach, the Discounted Cashflow Method depends on the concept that the value of a business is best estimated by the presently estimated value of the net income, cash flow, or dividend streams it can generate in the future. These evaluated surges of a business venture are then adjusted to reflect the time value of money as well as the associated business and economic risks of that enterprise.
The DCF Method is broadly recognised as the theoretically most valid approach. One can forecast net income, cash flows or dividends and then discount them to their net present value. The method is used only when cash flow information is not feasible. This is beacuse most privately held firms do not pay dividends and also it is less accurate than the Discounted Cash Flow Method.
Guideline Company Method
The Guideline Company Method is a strategy within the market approach, which analyses the subject to similar businesses that have been sold. The Guideline Company Method involves developing either relapse analysis and/or ratios of stock price to earnings (P/E Multiples), cash flow (P/CF Multiples), and Book Value (P/BV Multiples). The stock prices are those of public companies in the same or similar business as the company. Consideration is given to the opinion of informed investors and what they are willing to pay for the stock of comparative public companies as adjusted for the specific circumstances of the company.
P/E multiples set up in dynamic exchanging are expressions of what prudent, arms-length investors accept are fair and reasonable rates of return for these securities, given the risk inherent in those businesses. A risk analysis is then performed to compare the company to the publicly-traded firms in terms of size, diversity of operations and products, financial strength, profitability, growth, and other factors recognised as key indicators of risk in order to adjust the P/E multiple.