Do You Need a Business Valuation? Here’s a Framework to Help You.

valuation

Would you prefer to watch the video instead of reading?  The video is right here and here: https://youtu.be/2-swTmhbBUw.

I’ve spent a lot of time thinking about this and how I can help you answer this question.  Do you need a business valuation or do you need your business valued?  The key “big picture” question you should always ask first is:

What Are the Stakes?

The stakes are driven by two areas: #1 = People.  Who could get hurt? #2 = Money.  How much money could you gain or lose?

  • People.  We’re talking about real human beings who can be affected by the decisions to value a business and the result.  Who gets hurt if you’re wrong or your advisor is wrong?  Spouses, children, and shareholders can be impacted positively or negatively for years based on decisions made today.  Do you or your client understand the downside risk?

Here are two examples at opposite extremes. A young successful entrepreneur and sole owner of a business with no spouse or children.  He or she says, “Sell it.  I don’t care what it’s worth. Just get rid of it.”  Maybe you’re this entrepreneur yourself?  Should youth and marital status matter when weighing a decision like this? A husband and wife-owned business with a teenage son.  The business is the family’s sole source of income.  The mother and son are thrown out of their home by their [spouse/father].  The husband is also fraudulently representing the business income to the IRS and his bank.  The decision to value the business and the legal result will impact lifestyle, schooling, medical expenses, and retirement for decades.  What would you do in this situation?  What would you tell a friend in this situation?

  • Money.  How much money could you or your client lose if you’re wrong?  Have you quantified the downside risk of being wrong?  Here’s some simple math.

Business Cash Flow / Business Risk = Business Value (Illustration Only–don’t use these numbers.) $  50,000 / 20% =    $   250,000 $100,000 / 20% =    $   500,000 $500,000 / 20% =    $2,500,000 $600,000 / 20% =    $3,000,000 $500,000 / 16.6% = $3,000,000 What jumps out at you?  Here’s some hints.

  • You can shoot up to a multi-million-dollar business with modest cash flow.
  • A $100,000 understatement can result in a $500,000 value change.
  • What would you spend to close a $500,000 “value gap?” (Turning your guess into real data).
  • Are you comfortable estimating business cash flow and risk? If not, how would that impact you or your client?

Think about how people and money impact the stakes.  Your decision about whether you need a business valuation will become clear. Thanks, Josh

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Can I Help You? Hi, I’m Josh Horn, CPA, CVA of Horn Valuation. I help with business valuations in friendly or unfriendly situations. I also help owners build valuable companies. My clients are business owners and attorneys. If you’d like more information, check out my website hornvaluation.com, email me at [email protected], or call me at 217-649-8794.

Josh Horn CPA

I’m a licensed Certified Public Accountant (CPA) and credentialed in business valuation (CVA). I’ve been a tax and business consultant in a top 100 CPA firm and a controller in a large international company. I’ve also valued and been the primary advisor to multi-million dollar and small companies in various industries.

“If you’re not working on business value, who is?” Josh Horn, CPA, Certified Valuation Analyst

Not Knowing This Will Cost You Big Time

big time

Recently, I’ve run into some situations where someone was trying to value a business by cobbling the assets together as the only method.  This is Part 1 of a series addressing goodwill in a business.  

Picture a business as a plain old plastic bucket.  And into that bucket, we’re going to pour things like industry expertise, a talented workforce, and maybe some patents or trade secrets.  Then, we’re going to take our “business bucket” and go out into the world and start “watering seeds” and watching the business grow.  Can you see the stuff we put in our bucket?  No, you can’t see it.  Is the bucket much more valuable than the empty piece of plastic we started with?  You bet.  And that’s what goodwill is.  It’s that “invisible stuff” that is not recorded on the business’ books and records but drives a good portion of the business’ value.

Why is this important when valuing a business?

  • A business can easily represent over 90% of a family’s net worth.
  • Unless the business is worth more “dead than alive”, if you value it using only the visible assets, you’ve valued the empty bucket.  You’ve massively undervalued the business and forgot about goodwill.  (Identify)

Why is this important in a family law (divorce) setting when a business is an asset?

  • If the business has goodwill, you may be required to determine how much there is to meet the standards of your jurisdiction. (Quantify)
  • You may then need to split the goodwill into enterprise and personal pieces. Why?  Because enterprise goodwill is marital property and personal goodwill is not marital property in states such as Illinois where I live.  (Allocate)

Business valuation skills and judgement are essential to identify, quantify, and allocate goodwill.  Not knowing how to handle goodwill will cost you big time.

If you’d like to see this concept above on video:  https://goo.gl/y2Q6qA
If you’d like to see a video of how to quantify goodwill:  https://goo.gl/aUds5k
If you’d like to see a video of personal goodwill factors:  https://goo.gl/VhRKVz

Or email me at [email protected] and I’ll send you all 3 video links in secure and downloadable format.  Let me know if you want to talk about goodwill in business valuation or family law.

Call me if you would like to discuss valuing a business in divorce or litigation.

Thanks,
Joshua L. Horn, CPA, CVA
Horn Valuation
Phone: 217-649-8794
Email: [email protected]
Website: hornvaluation.com
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Horn Valuation is for attorneys,  judges, and business owners who believe there’s an easier way to settle business disputes and want to work with a valuation expert using fixed fees. I’ve been a CPA since 1999, a certified valuation analyst since 2008, and valued mom and pops to multi-million-dollar businesses. Call me today if you’re interested in working together on a valuation solution.