Business valuations are a key tool for privately-held businesses who are looking to create a succession plan or are getting ready to sell.
Weiss & Company LLP’s accountants have decades of experience creating these valuations. Frank Lee, CPA, CVA, a partner who manages the firm’s tax department, has been certified as an official CVA (Certified Valuation Analyst) for 20 years. Chris Bozarth, CPA, a partner who oversees the firm’s Accounting & Advisory Services Department, has been working with Frank on valuations the last decade and received his formal certification as a CVA on July 1.
Frank and Chris recently sat down to talk about their decades of experience in this area, and how businesses can best prepare for the valuation process.
What exactly is a business valuation, and why would a business need it?
Frank: It is a process to establish the economic value of a privately-held business. While public businesses have access to comparable market information, privately held businesses often do not, and there can be significant differences in how similar businesses are run. It can be difficult to assess what the actual value of the business is. That’s why certified valuation analysts like us are essential.
Chris: A business that needs a valuation is usually undergoing a critical event that is often leading towards a sale. That could be a result of a succession plan that includes buy/sell agreements with employees, family members, or an outside entity, or it could be because of a divorce or ownership dispute. Often in business valuations there are significant tax obligations that need to be sorted out, from how the ownership is structured to the business’s asset mix.
Frank, when did you first start conducting business valuations?
Frank: I started more than 45 years ago in accounting at the IRS, and I received my initial business valuation training when I was employed at the IRS’s appellate division in Chicago. At that time, outside training in this area was relatively non-existent. About 20 years ago, several certification bodies emerged, and I received my official CVA certification by the NACVA (National Association of Certified Valuators and Analysts). I’ve done valuations of many types of businesses. Chris has been working with me on valuations for 10 years and has helped with hundreds of valuations. He received his certification on July 1, so we are excited to work together as a team and grow our practice in the valuation area.
Tell me about how Weiss approaches business valuations.
Chris: We start with in-depth interviews and discussions with ownership to understand the business and structure, the unique features of the business, and what drives profit. Initial work is done to determine if there is a comparable entity, but in most cases, there is none. We consider this discovery process the single most important step.
Frank: There are three basic approaches to business valuation: the asset approach, the market approach (looking at comparable businesses), and the income approach (or capitalization of earnings). The capitalization of earnings approach is the most common for closely held businesses. Once the valuation method is determined, we look at all the factors that would affect that method, including the economy, industry, and the clients and business it might serve. It’s critical for owners to know what is driving the value of their business.
How is Weiss’s approach different than other firms?
Frank: We provide an independent, third-party view of a business. Every engagement is unique and interesting. We often focus on things the owner may not always be considering. When I begin the valuation process, my first thought is, if I were to walk in here with my checkbook, what would I be willing to pay for this business. From there, we dive deep into discovery.
Chris: Experience is a key component to our value. We have over 30 years of experience, and we approach valuations as a team of several members. We’ve earned a great reputation in the space that we have. Our size and depth, along with our competitive billing rate, gives us the opportunity to provide a great value while providing a high degree of service to the customer.
What should businesses that are about to undergo a valuation consider?
Frank: Review your internal systems. Maintain good records, systems and controls. Up-to-date financials are also important. Owners should have a thorough understanding of the drivers of value in their business and how they can make it more valuable. That’s critical not only to a smooth valuation process, but also in taking steps to maximize the value of their business.
Chris, what are you looking forward to as a newly certified CVA?
Chris: This will be a growing area for Weiss. We are expecting a general increase in the need for valuation as boomers continue to age, retire, and implement their succession plans. The transfer of wealth in the coming decade is going to be extraordinary.
Interested in having a business valuation done? Contact Weiss to learn more.