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Spotlight on the Market Approach

The three general ways to value a business include: the cost, income and market approaches. Here we compare and contrast two methods that fall under the market approach. Market approach overview Valuators typically compute pricing multiples when they use the market approach. These compare the prices paid in comparable, real-world transactions to some performance metric,…  Continue Reading »

A Business Interest Can Have Many Different Levels of Value

Define it before you assign it Two key issues when valuing a private business interest include control and marketability. If a business interest possesses elements of control, such as the rights to declare dividends and liquidate assets, then most investors will pay more. They also tend to prefer investments that sell with relative ease and…  Continue Reading »

Relying on Management’s Estimates of Expected Cash Flow

Business valuations are often based on estimates of expected cash flow made by the company’s management. Even when estimates are prepared by a valuator or the company’s CPA, it’s often based on management’s representations about the company’s future plans about potential threats and market opportunities. So, it’s important to evaluate whether expected cash flow seems…  Continue Reading »

How to Estimate Reasonable Owners’ Compensation

Although the issue of reasonable owners’ compensation often comes up in federal tax inquiries, it may also be an issue in shareholder disputes and divorce cases. For example, minority shareholders or the spouses of a controlling shareholder may claim that an owner is taking an excessive amount of salary, thereby impairing the value of the…  Continue Reading »

Is it Time to Switch to Subchapter S Status?

As Baby Boomers approach retirement, they have to face the fact that no one can work forever. If owners of C corporations are contemplating a sale, they may be able to save substantial corporate-level taxes by electing to operate as a “pass-through” S corporation. Here’s more about this tax break, including details on who might…  Continue Reading »

Spotlight on Marketability

Is it difficult to sell a business interest in Texas as well as other states? Public stocks can be converted to cash in three days, but it often takes a year or longer to sell a private business. Minority interests in private companies can be even harder to liquidate, because they may be subject to…  Continue Reading »

Valuators Can Take the “Stress” Out of Financial Distress

In the Houston area, and many other parts of the country, economic uncertainty persists. The American Bankruptcy Institute reported in the first quarter of 2016 that total commercial filings increased 24% from the year before. Valuation professionals can help businesses facing bankruptcy by determining whether liquidation or reorganization makes more sense, and provide guidance on…  Continue Reading »

Spotlight on Discount Rates

People in the Houston area, and throughout the country, who rely on appraisal conclusions, such as judges and attorneys, are becoming more comfortable with the income approach as the business valuation discipline matures. But how does a business’s perceived risk translate into a reasonable discount rate? This is one of the most subjective, and contentious,…  Continue Reading »

Tried-and-true Guidance for Valuing Private Business Interests

Revenue Ruling 59-60  The IRS originally created the landmark publication, Revenue Ruling 59-60, to outline the methods, approach, and factors to consider when valuing a closely held business for estate tax and gift purposes. Although it’s been around for nearly 60 years, today it’s often referenced in valuations prepared for other reasons, including divorce cases…  Continue Reading »

Writing Buy-Sell Agreements? Think Valuation First.

Buy-sell agreements protect business owners from unexpected events, such as disability or divorce, or a shareholder’s death. They are also helpful when owners disagree and want to buy out a difficult partner, or want to sell their interests. Unfortunately, valuation issues often take the backseat to legal issues, leading to irreconcilable differences when the agreement…  Continue Reading »

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