Why you may need a Business Evaluator sooner than you think
Ever since Solomon, judges have known that businesses are like babies - worth more undivided. However, two out of five American marriages end in divorce. Add to that partnership or shareholder disputes, (business divorce,) and there looms excellent odds for the family firm being held up to light as a divisible asset.
At this point, when one party seeks to take a share of cash while the other retains the business, the most important person in their lives may be their business evaluator. But evaluations need not always explode from some adversarial corporate tug-o-war. Just as frequently, evaluators pave the way for buy/sell agreements, family estates, gifts, succession planning, and taking a loan. In each case the expertise applied to the assessment can vary the final estimate immensely.
CPA Sharyn Maggio, president of Eatontown-based Maggio & Co., has evaluated business firms and provided forensic accounting for over two decades. Two years ago she founded the nationwide evaluators consortium Expert Resource Connections (www.ercllc.net.) “The one thing people always forget is that the business evaluator is no one’s advocate,” says Maggio. “He doesn’t fight for the owner, for his employer, or the highest price. He seeks only the most exact value.”
* Choosing an Evaluator. Typically, in dispute or divorce cases, the judge will appoint an evaluator. Or sometimes a quick lawyer will grab the reins and get his own appraiser installed. But Maggio argues you do not have to sit by passively. “This is not the judge’s or the lawyer’s business, it is yours,” she says. “Rather than settle for their old crony, you can insist on your own expert or have him work simultaneously.”
Whether it’s for a dispute case or something calmer, like succession planning, selecting an evaluator is something you don’t do on the cheap. Maggio cringes when she sees owners applying some online assessment template to determine the value of the business they have sweated a lifetime over. Enlisting the average CPA for evaluating, while thrifty, is about like asking a first year medical student to perform one’s surgery. A good evaluator has a lot more than CPA after his name. As a member of the American Institute of Certified Public Accountants, he may have taken the extra training and be qualified as an ABV - Accredited in Business Valuation (www.aicpa.org.) Additionally the evaluator may have joined the Institute of Business Appraisers (www.go-iba.org.) Also, experienced evaluators can be found from the American Society of Appraisers (ASA; visit www.appraisers.org.) Maggio herself has gained membership in these, as well as being an instructor for the National Association of Certified Appraisers.
Beyond the alphabet soup, Maggio suggests owners look for long time evaluation experience, at least ten years. Determining a company’s value with all the variables is a skill only honed over many years practice. She places less emphasis on finding an exact specialist appraiser. While there are individuals who evaluate only auto shops, Maggio feels that any good retail generalist can amply do the job.
* When and how often? For succession planning, buy/sell agreements, or stock recapitalization, business evaluation usually becomes an ongoing process. Any well crafted agreement that anticipates one party buying out other shareholder/partners will demand biannual or even annual reappraisal. Very likely, such agreements include some buy-out insurance, whose payments and premiums are dependent on the latest evaluation figures. Here again, Maggio winces at contracts that build in formulae, in an attempt at keeping values current. Such templates seldom account for such variables as one shareholder being terminated, caught embezzling, or the entire company experiencing a fire.
* Evaluators’ Alchemy. It is myth that evaluators hold some Procrustean formula into which they mercilessly stretch or cram each business, regardless of type. There exists no one-size-fits-all template. Such templates as are available online, Maggio advises, are best employed only to satisfy owners’ idle curiosity.
In seeking that final dollars’ worth number, the evaluator spirals in slowly. First, he examines the overall health of the company, then how it relates to the industry, and finally how the industry relates to the general economic climate. At this point, the evaluator is thinking like an investor - trying to determine the business’ current risk. Higher risk, anything ranging from poor industry status to high employee turnover, equates to lower value. This done, he chooses an apt examination approach for the individual firm. There exist endless types, with three classics being income, asset, and market approaches. “Obviously while each approach must be inclusive, it’s more a matter of appropriate emphasis,” says Maggio.
With the income approach, cash is king. Companies with little tangible assets and/or strongly unpredictable futures, such as software developers, can give a vision of their stability and potential worth beginning with an income-outflow base. The asset approach may be more suited to a construction firm with a less steady income stream. Such companies often hold substantial tangible holdings as well as employees or skilled slots (e.g. crane operators) capable of generating great income as periodic contracts come in. The market approach is more comparative, scrutinizing how the company's products are moving in the market overall and compared to competitors and other fields. Finally, all books and records are investigated in detail within a flow of endless variables and adjustments. Capitalization rates, discounted cash flow, asset valuations are all part of a very individual picture. “It is a blend of art, archeology, and science,” says Maggio. “Even though there do exist some formulae, getting the actual true numbers to fit that formula requires great subjective expertise.”
If the company principles are cooperative, once the details are on her desk, Maggio can deliver an estimate in three to six weeks. Since she aids in litigation, she typically charges by the billable hour, though for some small, family-held companies she and other appraisers may charge a flat fee.
* Serious Jail Time. The evaluator’s goal is to get into substance. This means any little irregularity in the books raises an eyebrow. “The most common misuse I encounter is the business credit card given to every family member and paid for by the company,” says Maggio. On a larger scale, Maggio has unearthed airplanes, vacation houses, an apartment on St. Bartholomew’s, and enormous gifts of jewelry all listed as business expenses.
While including junior’s college car as a business expense may be a handy tax dodge, owners do not want such peccadilloes brought before a judge. As officers of the court, judges are duty bound to report these evasions to the IRS. Upon finding such incriminating evidence, Maggio usually informs the owner and encourages him to get his dispute settled out court, in binding arbitration. Judges smile knowingly at these shifts in venue, and the owner breathes a sigh of relief.
Business evaluation has become one of the fastest growing fields in accounting. Despite, or perhaps because, it is one of the most creative and trickiest areas of the profession, young CPA’s are all seeking the skills. And since it is a wise company that knows its own worth, the trend continues for evaluators to become increasingly swamped with fresh clients.
Sharyn Maggio provides business evaluation and forensic accounting services for all-size clients through her firm Maggio & Co. in Eatontown. Two years ago, to strengthen her industry’s capabilities, she founded Expert Resource Connections, a nationwide consortium of business evaluators of all specialties. This association offers backup consultation and specific expertise for both members and clients. Maggio grew up in Deal Township, not far from her current offices. She graduated from Monmouth University with a bachelors in business and accounting, and took her CPA in l987. Her seven years between college and CPA were spent analyzing financial statements of business loan candidates. “That’s what really sharpened my skills in determining a company’s value,” she says. She credits her accounting enthusiasm to her mother, who was always a “great numbers person.”
Article Summary Certified Business Evaluator and CPA Sharyn Maggio tells why you may need your business evaluated sooner, and more regularly than you think. She also gives tips on choosing the right evaluator for your firm.
