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Business Valuation - What is it?

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Presentation to the April 2012 American Gem Society Conclave on Business Valuation in connection with succession, gift and estate planning and buy/sell agreements

Presentation to the April 2012 American Gem Society Conclave on Business Valuation in connection with succession, gift and estate planning and buy/sell agreements


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  • I’m Dan PharrShow JewelryWorking in jewelry many years, if not your whole life.Today, take the profit from jewelry and talk with you about how to keep as much of it as possible instead of giving most of it to our friends in Washington.Question – Who has had a BV, Thinking about one, Don’t give e darn, Just needed some place to goQuestion – Estate /Succession Plan or Buy/sell
  • Business Valuation Discussion Points – Count 1 - 5Why Me? –What a Business Valuation is and what it is notWhy You May Need a Business Valuation – not want – root canalValuation OverviewCase Studies
  • Disclaimer: I am not a lawyer. I’m told I Have to say this stuff so I don’t need one.
  • Why Me? – 5 MinutesBackground Jewelry – 28 years JBT – Chairman JVC – 24KCPA - Certified Public Accountant.11 years experience in public accounting, 4 Years BVBusiness Valuation credentials and qualificationsABV – Accredited in Business Valuation – Business Valuation Certification awarded by the American Institute of Certified Public Accountants.CVA – Certified Valuation Analyst – Certification earned from the National Association of Certified Valuation AnalystAbility to analyze Business Valuation engagements from both the independent accounting side and the closely held and family owned business side.BV Experience Retail Jewelry BusinessesManufacturing Jewelry Companies Various Non-Jewelry Related Companies
  • What a Business Valuation is and what it is not.It is not aReal Estate AppraisalEquipment or Machinery AppraisalInventory AppraisalHowever, a Business Valuation may often include appraisals of Real Estate, Equipment, and Inventory.A Business Valuation is a Comprehensive Appraisal of the Overall Value of a Business or Business Interest.
  • Why business owners may need a Business Valuation. Don’t Want one – Root CanalTypical client Closely Held Companies.Family Owned Business.Gift & Estate Tax Planning - Family Owned BusinessSuccession Planning - Family Owned BusinessBuy/Sell Agreements - Closely Held CompaniesSales/Acquisitions/MergersMarital Dissolution – The polite name for Divorce – Where you and you spouse don’t like each other very much any more, that Spouse wants have of the Business
  • Comment about Scare tactics2012 – 5.12 Million – 35%2013 – 1Million – 55%2013 Probably somewhere in between – 2.5MM to 3.5MM – 45% - 55% - 1,000,000 for gifts - Valuation Discounts may be gone, maybe even retroactive – Big Deal!!!
  • Valuation Overview – Brief – Deer in Headlights – Please stop me & Ask QuestionsPurpose of Valuation – Est Tax, Gift Tax, Buy/Sell, Sale, Acquisition, Owner disputesInterest being valued – All, Minority, ControllingStandard of Value – FMV, Strategic, FVPremise of Value – Going Concern, LiquidationFinancial Analysis – F/S, Ratio IndustryEconomic Analysis – National, Regional, IndustryValuation Approach – Asset, Income, MarketConclusion and Opinion of Value – My opinion of the value of the company / Calculation of Value
  • Depends on the Type of Valuation Full Valuation Report – Conclusion of ValueUse SlideCalculation of ValueUse Slide
  • Time Frame – 4-6 weeks from time all data is received.Cost - Full Valuation Fixed Fee – Maybe Range or Fee not to exceed a maximum amt Based on time plus out of pocket expensesCompany Size, Complexity, Condition of Records40 to 60 hoursRoughly the fee for a full valuation report will be in the $8K to 10K plus travel and out of pocket expenses. May go higher, but generally in this rangeCost - Calculation of Value20 – 30 hoursRoughly $4K – 6K
  • Questions to ask if there are noneStandards of Value – FMV, Strategic Value, FVValuation Discounts – MID, DLOM, Possible change in Tax lawsValuation Approaches – Income Approach, Asset Approach, Market Approach.
  • Go over SlideNo Money to fund buy/sell or Succession / Estate plan – Up the Creek w/o a paddle
  • Can your child run the businessDifference between Equal and EquitableDo you go 50 - 50 or 51 – 49. Better to have someone in control, instead of no one being able to make a decision.Different assets to those in business and those not in the business. Children not in business should not gain form the work of their siblings, nor should they be penalized for their failures.Keep in mind the difference between equal and equitableBuy/Sell – Based on Valuation – plus or minus premium or disc to purchaser. Seller has option to be the buyer instead at the same price.Planning done correctly – Still got screwed up. Death of Father and Daughter, Son left with minority interest.
  • BV Should be part of every buy/sell agreement. Sales price does not have to equal the value, but be part of the formula.Way to determine value without getting a lot of lawyers involved and a way to keep it out of court.Insure a fair price is being paid or receivedCan be part of a purchase agreement where final price is based on results down the roadOther owner – pure investor – how to you determine a price to buy him out.
  • Death of partner – Now your partners wife is you new partner - Business Killers – Video – Business Owner and wife of deceased owner. Given recent economy, wife may be the happy one.Death of a parent – Is there cash to fund the estate taxes or will the business have to be sold. Go over Business Killers.Succession Plan – How to use the valuation / type of valuation – keep owners informed with general info and values. A calculation of value should be fine. Triggering event – Death of parent, business partner, investor. McLaren story – successful start – profitable in the recession – good outlook – investor died, estate called loans. No buy/ sell, no insurance on investor. Had to close doors. Fortunately he found a new investor. Unfortunately, the new investor changed his mind and pulled his money. Jewelry store is now out of business.Need a funding mechanism. Accumulate funds, borrow from bank, find an individual investor, get life insuranceNot here to sell insurance, but may be the easiest way to fund the plan.
  • I have good brief explanation of possible changes in gift and estate laws and what the changes have been. Leave card and I will be happy to send them to you.Did not hand out copy of PowerPoint – Goes in bag which goes in the corner, never to be seen again , execpt when you dump it out because you need the bag to carry some stuff. I will be happy to email it to you.If you have additional questions, I will be around after this session is over and for the rest of the conference. Will be glad to meet with you to discuss any questions or particular concerns, at no charge of course. Also if you have questions or a particular situation you would like to discuss, don’t hesitate to call or contact me. I’ll be glad to try to answer any questions you have. This would also be at no charge.One last time. Before we close. Are there any questions? Remember Gift and estate tax laws end in December 2012.Thank you.
  • Transcript

    • 1. 5 Major PointsPharr Valuation & Business Services, LLC 1
    • 2. 5 Major Points1. Why Me2. What It Is (What It “Ain’t”)3. Why You May Need it4. Business Valuation Overview5. Case Studies Pharr Valuation & Business Services, LLC 2
    • 3. • I am not a Tax Attorney.• This should not be taken as tax or estate planning advice, but only as issues and areas to consider.• You should consult a experienced estate tax attorney when considering any gift or estate tax planning ideas or issues. Pharr Valuation & Business Services, LLC 3
    • 4. • Jewelry Industry - 28 Years• EVP and CFO of Hoover & Strong, Inc.• JBT• 24K Club of New York• JVC• CPA••• Specialty - Jewelry Industry Pharr Valuation & Business Services, LLC 4
    • 5. • A Business Valuation is an Comprehensive Appraisal of the Overall Value of a Business or Business Interest. “ It Ain’t “• A Business Valuation is not a: – Real Estate Appraisal – Equipment or Machinery Appraisal – Inventory Appraisal Pharr Valuation & Business Services, LLC 5
    • 6. • Typical client – Family Owned Businesses – Closely Held Companies.• Gift & Estate Tax Planning• Succession Planning• Buy/Sell Agreements• Sales/Acquisitions/Mergers• Owner / Stockholder Disputes• Marital Dissolution Pharr Valuation & Business Services, LLC 6
    • 7. • Dec 2012 – Gift & Estate Tax Laws Expire• Business Values are low. You can give away a larger interest.• Dec 2012 – Gift & Estate Tax Laws Expire• Current Gift and Estate Tax Exclusion is $5,120,000 per person – 35% Max Tax• Dec 2012 – Gift & Estate Tax Laws Expire Pharr Valuation & Business Services, LLC 7
    • 8. Purpose of ValuationInterest being Valued VALUATION REPORTStandard of Value Trudi’s Fine JewelryPremise of ValueFinancial Analysis Naples, FloridaEconomic Analysis Valuation Date: December 31, 2011 Report Date: February 3, 2012Company AnalysisValuation Approach Conclusion and Opinion of Value Pharr Valuation & Business Services, LLC 8
    • 9. • Full Valuation Report – Detailed Comprehensive Report – 75 to 100 Pages – Conclusion Of Value for the Appraised Interest – Support Values on a Gift or Estate Tax Return• Calculation of Value – Less Detail – 20 to 40 Pages – Calculated Value Based on Agreed Upon Procedures – General Ball Park Value Pharr Valuation & Business Services, LLC 9
    • 10. • Time Frame: Four to Six Weeks• Cost: – Generally Fixed Fee – Based on the Estimated Time Plus Expenses – Depends on Company Size, Complexity, Condition of Records – Full Valuation Engagements • 40 to 60 Hours – Calculation of Value Engagements • 20 to 30 Hours Pharr Valuation & Business Services, LLC 10
    • 11. Pharr Valuation & Business Services, LLC 11
    • 12. Pharr Valuation & Business Services, LLC 12
    • 13. • Gift & Estate Planning should be done• Owners need a Succession Plan• Having a Buy/Sell is better than not having one• There is a mechanism to Fund the plan Pharr Valuation & Business Services, LLC 13
    • 14. • Succession Plan• No Children• One Child• More than one Child who wants to be in the business• More than one child, some want to be in the business and some do not.• Gift the business to your children, sell it to them or do some of both? 14 Pharr Valuation & Business Services, LLC
    • 15. Buy /Sell Agreements Selling to Other Owners Buying Another Owner’s Interest Selling to Existing Employees Selling to someone outside the CompanySources of Funds Internal Life Insurance Bank Other Hit Lottery / Get Lucky While at the Vegas Show Pharr Valuation & Business Services, LLC 15
    • 16. • Death of a Spouse• Death of a Parent• Death/Retirement/Termination – Family Member or Partner – Succession Plan – Buy/Sell Agreement – Funding• Marital Dissolution - Owner Disputes Pharr Valuation & Business Services, LLC 16
    • 17. 5 Major Points1. Why Me2. What It Is (What It “Ain’t”)3. Why You May Need it4. Business Valuation Overview5. Case Studies Pharr Valuation & Business Services, LLC 17
    • 18. Dan PharrPharr Valuation & Business Services, LLC2720 Newquay LaneRichmond, VA 23236-1362Office: 804-332-5458 Cell: 804-370-3040Email: Dan@PharrValuation.comWebsite: www.PharrValuation.com Pharr Valuation & Business Services, LLC 18