Give Yourself the Gift of a Valuation This Holiday Season?

/in , /by Al Statz

As the year winds down, there’s a gift every business owner should consider—a current valuation of your business. Knowing the true value of your business is a gift that keeps on giving. Here’s why.

Estate Planning

One of the key benefits of a valuation is that it sets the groundwork for smart estate planning. If the unforeseen happens, knowing your business’s worth simplifies the inheritance process for your heirs and ensures they receive what you intended. It can also help prevent disputes and legal entanglements that can arise when valuation estimates are murky or outdated.

Exit Planning

Whether you’re ready to step back next year or in the next decade, a valuation helps solidify your exit plan. With an accurate understanding of your business’s worth, you’re empowered to plan the best timing for a sale or transfer, negotiate confidently, and minimize surprises.  Unfortunately, studies show most owners spend very little time planning how they will exit their business. The smaller the business, the less likely the owner is to plan ahead—most start preparing less than a year before selling. This rushed approach can lead to a lower sale price, lost leverage in negotiations, failed transactions, and missed opportunities to boost the business’s value before hitting the market.

Build a Stronger Business Next Year

Even if a sale isn’t on your immediate horizon, the insights gained from the valuation process can guide strategic decisions to increase your company’s value over time. Knowing what adds or detracts from your company’s worth can help you decide on investments, operational changes, and growth strategies.

This holiday season, consider giving yourself a gift of increased clarity, direction, potential liquidity and peace of mind in the new year.

To learn more, see our prior post on the Six Benefits of Monitoring Company Value.

Scaling for Sale: Growth Strategies that Double as Exit Plans

/in , , /by Al Statz

As a business owner, you’re likely consumed with the daily challenges of building and growing your business. The question of selling might seem like a distant concern—something to worry about years down the road. But the reality is that planning your exit and growing your business are two sides of the same coin.

We’ve been conditioned to think about entrepreneurship in distinct phases: First, you build; then, you grow; finally, you sell or pass it on. It seems logical, doesn’t it? But this linear thinking misses a crucial point: Building scalable value and preparing for an exit are not separate processes—they’re intrinsically linked.

By viewing them as separate endeavors, we put ourselves at a disadvantage. We might inadvertently grow a business that provides a decent income in the here and now but has little value to future buyers. Instead, adopting a seller’s mindset from the outset can transform how you approach your business, driving growth and creating lasting value.

Most Entrepreneurs Exit Empty Handed
Estimates suggest only about 25% of businesses on the M&A market will successfully transition to new owners. Even certified and well-networked M&A advisors report that 50% of their engagements terminate without closing, according to the IBBA and M&A Source Market Pulse Report.

The reasons are myriad from valuation discrepancies, conflicting expectations, and due diligence challenges, to underlying operational issues such as customer concentration, overreliance on key personnel, and static business models.

So while starting a business is challenging, successfully exiting one can be just as difficult. This is where the wisdom of maintaining a “seller’s mindset” comes into play. Business owners who adopt a seller’s mindset aren’t just building for today or tomorrow; they’re crafting a legacy designed for eventual transition.

This approach doesn’t mean these leaders are any less passionate or committed to their ventures. On the contrary, it adds a layer of strategy and foresight that can significantly enhance a business’s long-term value and success.

The Entrepreneur’s Paradox: Less Doing, More Growing
One of the key principles of building a business with a seller’s mindset is focusing on working “on” the business rather than “in” it. This shift in perspective is part of creating a company that can operate independently of its owner.

When you work “in” the business, you’re caught up in day-to-day operations, fighting fires, and personally handling key client relationships. While this hands-on approach is often necessary in the early stages, it can create a business that’s overly dependent on you as the owner.

Working “on” the business, however, involves:

  1. Developing systems and processes that can run without your constant oversight
  2. Building a strong management team that can operate the business in your absence
  3. Creating a strategic plan for long-term growth and sustainability
  4. Investing in technology and infrastructure to improve efficiency and scalability
  5. Focusing on strategic partnerships and market positioning

By adopting this approach, you’re not only creating a more valuable business in the eyes of potential buyers, but you’re also giving yourself more freedom to focus on high-level strategy and personal goals.

From Owner’s Pride to Buyer’s Prize
As you shift from working in your business to working on it, your perspective naturally begins to align more closely to that of a potential buyer. And ultimately, your business is only worth what someone else is willing to pay for it.

So, what exactly makes a business valuable to buyers? The answer might surprise you. While profitability matters, it’s not always the primary driver of value in M&A transactions. Buyers are looking for businesses that offer more than just a healthy bottom line—they want potential for growth, strategic advantages, and operations that can thrive under new ownership.

For example, we sometimes see businesses with 40% or more customer concentration, particularly in the manufacturing space. It happens easily enough—the business has a great relationship with its biggest customer, and the work is steady and profitable. It’s great income now, but it makes this business a risky proposition for a future buyer.

As mentioned above, over-reliance on an owner can also diminish business value. A business that depends heavily on the owner’s personal relationships, expertise, or daily involvement may struggle to maintain performance under new leadership.

Other factors that can negatively impact value include:

  • Failure to innovate or keep up with industry trends
  • Delayed investments in technology or equipment
  • An unstable workforce or high turnover rates
  • Lack of documented processes and procedures
  • Inconsistent financial performance or unclear financial records

Building your business with a seller’s mindset means identifying and developing value drivers while simultaneously driving out risk factors that could reduce buyer confidence or limit their ability to succeed.

The Valuation Report Card
Now that you know a little bit about what buyers value, it’s time to take an honest look at your own business. But how can you objectively assess your company’s worth and identify areas for improvement? Consider getting a regular estimate of value.

Imagine sending your child through 12 years of school, only to discover in their senior year that they’re woefully unprepared for graduation. It would be a shocking and potentially devastating revelation, wouldn’t it? Yet, many business owners unknowingly put themselves in a similar position.

Just like a report card provides feedback on a student’s progress, a business valuation can offer vital insights into your company’s health and market position. A valuation can serve as a comprehensive scorecard, highlighting your business’s strengths and pinpointing areas that need improvement. It provides a clear picture of how the market perceives your company and what factors are driving or diminishing its value.

Without this periodic assessment, you might be operating under false assumptions about your business’s worth. Perhaps you’re overestimating its value, setting yourself up for disappointment when it comes time to sell. Or maybe you’re undervaluing your company, putting your financial security and legacy at risk.

Calculating Your Exit Equation
But knowing your business’s value is only half the equation. The other half? Understanding what that value means for your personal goals. After all, the ultimate purpose of building a valuable business isn’t just to create an attractive asset—it’s to create the financial foundation for the life you want to lead.

Many business owners fall into the trap of waiting for a predetermined age or milestone to sell their company. However, this approach can lead to missed opportunities or, worse, financial shortfalls. Instead, consider aligning your exit strategy with your personal financial goals by understanding your “lifestyle number.”

Your lifestyle number is the amount of capital you need to receive from your business exit to achieve financial freedom and realize your goals or live your ideal lifestyle. When you get clear about your goals—and have an objective opinion on how much your business is worth—you can make better informed decisions about growing (and exiting) your business.

The Exit Roadmap
Finally, it’s time to think about the actual nuts and bolts of preparing for a sale. Many business owners make the mistake of treating their exit as an event rather than a process. For some owners, this means they’re leaving significant money on the table when it’s time to sell.

Depending on the nature of your business, a comprehensive exit plan might address areas like these:

  1. Transferrable contracts: Ensure key contracts can be transferred to a new owner without dispute or disruption.
  2. Management team retention: Consider tying up your management team with stay bonuses or equity to ensure continuity.
  3. Clean financials: Maintain clear, organized accounting records. Consider audits to boost buyer confidence or a sell-side quality of earnings report prior to going to market.
  4. Working capital optimization: Understand how working capital impacts your take-home money after a sale and optimize it in the years leading up to a sale.
  5. Tax planning: Understand the tax implications of different deal scenarios to maximize your after-tax proceeds.
  6. Buyer options: Explore different exit options and the pros and cons of each. Understand how each option might impact your key managers, family members, or real estate strategy.

Some of these strategies can take two or three years to put in place. Plus, some sellers can’t walk away immediately after a transaction. Depending on deal terms, you may need to provide a certain amount of seller financing or stay involved in a consulting role.

Don’t wait to find out you have to trade value for time. Plus, the sooner you plan, the more options you will have and the better prepared you’ll be to exit with leverage, on your own terms.

Seller Strategy = Growth Strategy
At the end of the day, growing your business with a seller’s mindset isn’t about looking for a quick cash-out; it’s about creating something of lasting value that can thrive even as ownership changes hands. By adopting a seller’s mindset, you’re committing to:

  1. Creating systems and processes that allow your business to thrive without your constant involvement
  2. Building a strong, capable team that can drive the business forward
  3. Focusing on sustainable growth and diversification
  4. Maintaining clean, transparent financials
  5. Continually assessing and improving your business’s value

This approach not only prepares you for a successful exit but also creates a stronger, more resilient business in the present. It pushes you to think strategically, to focus on what truly adds value, and to build something that can stand the test of time.

Whether you plan to sell your business next year, pass it on to the next generation, or continue growing it for decades to come, building your business with a seller’s mindset will serve you well. It’s not about whether you’re ready to sell right now; it’s about maximizing the value of what you’ve been building and creating options for your future.

Goodwill hunting: How to build and finance this intangible asset

/in , , /by Al Statz

When it comes to selling a business, the term “goodwill” often arises. But what exactly is goodwill, and how does it impact the mergers and acquisitions (M&A) process?

Goodwill is the value of a business that exceeds its tangible assets. It arises when a company is sold for more than the worth of its physical assets such as equipment, vehicles and inventory.

Most successful companies have some level of goodwill, which is tied to cash flow. For example, consider a company with $2 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) that sells for a 6 multiple, resulting in a $12 million valuation. If the company only has $5 million in physical assets, the remaining $7 million is considered goodwill.

Building goodwill. Goodwill is typically derived from the company’s ability to generate strong and consistent cash flows. Factors such as a loyal customer base, effective management team, a solid market position, and a unique value proposition all contribute to a company’s ability to generate cash flows above and beyond the value of its physical assets.

Goodwill can also be attributed to factors that de-risk the company. A strong brand, a large and diversified customer base, recurring revenue, a reliable supply chain—these are just some of the factors that give a buyer confidence they will be able to replicate performance and drive growth in the future. The more growth opportunities and less risk perceived by the buyer, the higher the multiple, and consequently, the more goodwill.

Financing goodwill. However, goodwill presents challenges when it comes to financing a deal. Goodwill is an intangible asset, which means it lacks the physical substance and clear valuation of tangible assets (again, such as equipment, vehicles, or inventory). Most traditional lenders, such as banks, often prefer to secure their loans with tangible assets that can be easily liquidated in case of default.

Moreover, the value of goodwill can fluctuate based on market conditions, industry trends, and the overall financial health of the company. If a business experiences a downturn or fails to meet its projected cash flows, the value of its goodwill may be impaired, leading to potential write-downs and negative impacts on the company’s balance sheet.

To overcome these challenges, businesses often need to explore alternative financing options or structures when dealing with significant amounts of goodwill. Seller financing or equity rollovers can help provide funding for goodwill, when traditional lenders won’t support it.

For smaller deals under $5 million, the Small Business Administration (SBA) offers loan programs that provide banks with a 75% guarantee, allowing them to take on more goodwill. For larger deals, strategic buyers with strong balance sheets, private equity groups, or family offices are generally better positioned to acquire a business with significant goodwill. These buyers can bring more

equity to the table or may already have alternative acquisition lending in place, such as mezzanine lenders

In the current deal market, most acquisitions above $10 million have a capital stack of 50% equity and 50% debt. Using the example above, that means the buyer would bring $6 million to the table and the senior lender (e.g., the bank) would only have about $1 million in exposure above and beyond the company’s tangible assets. That’s fairly palatable on a $12 million deal.

Allocating goodwill. When a business is sold, the purchase price is typically allocated among the various assets being acquired, including both tangible and intangible assets. However, the allocation of goodwill can have significant (and opposing) tax implications for the buyer and the seller.

In an asset sale, the buyer and seller will typically negotiate the allocation of the purchase price, considering the tax consequences for each party. The buyer generally prefers to allocate more of the purchase price to assets that can be depreciated quickly such as equipment, vehicles or other tangible assets, in order to maximize their tax deductions. The seller typically prefers to allocate more of the purchase price to goodwill, as it is generally taxed at a lower capital gains rate.

An indicator of success. At the end of the day, goodwill is a powerful sign of success. However, this intangible asset can also present challenges when financing an M&A deal. Business owners looking to sell their companies should be prepared to explore creative financing solutions and navigate negotiations around asset allocation. Experienced M&A advisors and tax professionals can help.

What Does ChatGPT Think?

/in , /by Joe Orlando

This October, I will celebrate my 12th year as an Accredited Senior Appraiser (ASA) in Business Valuation with the American Society of Appraisers (also ASA). ASA members meet every year for an International Conference to discuss current topics and to share knowledge and best practices. I attended the most recent Conference in Portland, OR. A presentation entitled “The AI Revolution – Why it Matters to Appraisers & Application Strategies” by Greg Endicott of Strategic Value Group, LLC summarized a BVResources Survey on AI as follows:

 

1.  Adoption: About 48% of business valuation (BV) firms are using AI, primarily for researching economic or industry conditions.

 

2.  Popular Tools: ChatGPT is the most popular AI tool, used by70%of respondents. Other tools include Copilot, Bard (now Gemini), and Grammarly.

 

3.  Concerns: 52%of firms are not using AI due to trust issues, data confidentiality concerns, and fear of AI “hallucinations.”

 

These takeaways were based on a survey of Business Valuation firms, not the general public. So, if about half of the BV firms surveyed are using AI, what can someone looking for a valuation get from asking a simple question into an AI engine?

 

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Here is the free answer a business owner gets from ChatGPT:

The “rule of thumb” in valuing a business as a multiple of EBITDA generally follows broad guidelines, depending on the business’s size, industry, and growth potential. Here’s a quick overview of common multiples based on these factors:

 

Rule of Thumb by Business Type/Size

1.  Small Businesses (less than $10 million in revenue):

o  3x – 5x EBITDA: Small businesses with modest revenue and growth potential usually command lower multiples due to higher perceived risks and less scalability.

 

2.  Medium-sized businesses ($10 million – $100 million in revenue):

o  5x – 7x EBITDA: These companies tend to attract higher multiples as they are more established, often with stronger growth prospects and greater market presence.

 

3.  Large Businesses (over $100 million in revenue):

o  7x – 10x EBITDA or more: Larger, well-established companies with stable cash flows, competitive advantages, and strong management teams often get higher multiples. These businesses are usually more attractive to institutional investors or private equity firms.

 

Rule of Thumb by Industry

1.  Low-Growth or Capital-Intensive Industries:

o  3x – 5x EBITDA: Industries like manufacturing, construction, and retail, which often have higher fixed costs and lower growth potential, typically have lower multiples.

 

2.  Moderate-Growth Industries:

o  5x – 7x EBITDA: Businesses in sectors like healthcare services, logistics, or consumer products generally attract mid-range multiples due to their stable but moderate growth prospects.

 

3.  High-Growth Industries:

o  8x – 12x EBITDA or more: Technology, software, and biotech companies with high growth potential and scalable business models can see much higher multiples, sometimes exceeding 12x EBITDA, especially if they have recurring revenue models.

 

Simplified Rule of Thumb:

For most small and mid-sized businesses in stable industries, a 4x to 6x EBITDA multiple is a common rule of thumb.

So, does this artificial intelligence have it right? Sort of. However, the above ranges and rule of thumb come with the implied caveat, “it depends…”

1.  It depends on the industry;

2.  It depends on the size of the revenue;

3.  It depends on the amount of EBITDA;

4.  It depends on the future growth of the Company and

5.  It depends on the risk in achieving this growth.

 

Historical Data in Support of ChatGPT Multiples

In testing these ChatGPT multiples, we looked at a database of actual transactions of lower middle market deals over the past few years. Below is a summary of rolling average EBITDA multiples for real deals up from the 4th quarter of 2020 through the 2nd Quarter of 2024. The data is compiled by GF Data, which collects and provides data primarily from private equity (PE) sponsors and other deal professionals involved in middle-market mergers and acquisitions (M&A). The data covers a range of metrics, including transaction multiples, leverage levels, and other deal terms, and is generally vetted and aggregated to protect the confidentiality of individual transactions while providing a robust data set for market analysis.  

As databases go, this one is pretty good. It has a statistically significant dataset populated and used by dealmakers. I like to use these multiples often to value businesses with significant EBITDA of at least $2 million or more. Here are the average multiples for all industries based on transaction enterprise value (TEV), by industry and by EBITDA size.

 

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Based on the above charts, GF Data does a good job supporting ChatGPT’s “rule of thumb” estimates for medium to large companies of 5x to 12x. However, because GF Data’s multiples are averages, they don’t specify outlier deals with lower and higher multiples than the 6.4x to 8.6x multiple ranges by industry.

 

For smaller deals,  we have used the Business Reference Guide as a strong “pricing guide” as our first iteration of value when discussing with a potential client a rough estimate of the value of their small businesses.

Conclusion

 

My conclusion is that ChatGPT does of job of cobbling together a starting point for a discussion on the value of your business, but it doesn’t do the job of a business valuation appraiser or M&A advisor. Use ChatGPT like you use Zillow.com to value your house. The multiples above will give you a very rough estimate of the value of your business. However, this first iteration will not suffice for compliance (litigation as well as gift, estate, or income tax) or strategic (exit planning, assessment for sale, or merger) purposes.

 

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, and strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA, at 503-925-5510 or jorlando@exitstrategiesgroup.com.

 

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, and strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA, at 503-925-5510 or jorlando@exitstrategiesgroup.com.

M&A Tip: Use Acquisitions to Expand Your Business

/in , /by Exit Strategies

In today’s competitive business landscape, standing still means falling behind. Business owners and management must constantly find ways to grow, and one of their most bold and strategic moves is acquiring other businesses. This “buy and build” approach can offer a fast track to expansion, with both benefits and inherent risks. Here we summarize the benefits and risks involved in inorganic growth, and the essential advisors needed to navigate this complex terrain successfully.

Benefits of Growth Through Acquisition

  • Rapid Market Expansion: Acquisitions provide immediate access to new markets and customer bases, bypassing the slow organic growth process. 
  • Diversification: Acquiring businesses in different but related sectors can diversify a company’s revenue streams, reducing dependency on a single market. 
  • Operational Efficiencies: Integrating another business’s operations can lead to cost savings and efficiency gains through economies of scale. 
  • Acquisition of Talent: Bringing in seasoned teams with specialized skills can enhance your business’s capabilities overnight. 
  • Intellectual Property Gains: Acquisitions can bring valuable intellectual property, from patented technologies to brands, which can be leveraged for competitive advantage. 

Risks of Growth Through Acquisition

  • Cultural Misalignment: Integrating two different company cultures poses significant challenges and can impact employee morale and productivity. 
  • Financial Strain: The cost of acquisition, especially if leveraged, can place a significant financial burden on the acquiring company. 
  • Integration Complexities: The logistical challenges of merging systems, processes, and teams can be considerable and disruptive. 
  • Overestimation of Synergies: The anticipated benefits from synergies may not materialize as expected, impacting the acquisition’s profitability. 
  • Regulatory Hurdles: Depending on the industry and scale of acquisition, regulatory approvals can be a complex and time-consuming process.

Navigating Acquisitions with the Right Advisors

To maximize the benefits and mitigate the risks of acquisitions, surrounding yourself with a skilled advisory team is paramount. These experts should include:

  • M&A Advisor/Broker: Specializes in identifying potential acquisition targets, negotiating deals, and guiding business owners through the acquisition process. 
  • Financial Advisor/Accountant: Provides insights into the financial health of potential acquisition targets, evaluates the financial implications of a deal, and ensures the acquiring business can sustain the financial load. 
  • Legal Counsel: Specializes in M&A to navigate contractual details, due diligence, regulatory compliance, and to mitigate legal risks. 
  • HR Consultant: Assists with the integration of staff and alignment of cultures, policies, and benefits between the companies. 
  • Strategy Consultant: Offers an objective viewpoint on how an acquisition fits within the broader strategic goals of your business and can assist with post-acquisition integration planning. 

By leveraging the expertise of these advisors, a business owner can make informed decisions, carefully evaluate potential targets, and execute acquisitions that align with their growth strategy. While acquisitions are not without their challenges, with meticulous planning, thorough due diligence, and strategic execution, they can serve as powerful catalysts for business growth. The key is to balance ambition with careful risk assessment, ensuring that each acquisition not only adds to the company’s assets but also fits seamlessly into its long-term vision and operational framework. 

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

From the M&A Glossary: Sale Leaseback

/in , /by Exit Strategies

A Sale Leaseback is a financial transaction in which a company sells an asset, usually real estate, to another party and then leases it back from the new owner for a negotiated period and other agreed upon terms.  

This arrangement allows the seller to convert the value of the asset into cash while retaining the right to use the asset through a lease agreement.

Sale leasebacks can be advantageous for companies looking for a source of cash to pay down debt or invest in growth opportunities, while retaining access to critical assets.

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

The Exit Podcast: Tactical Acquisitions and the Importance of Scaling Fast with Tony Westfall

/in , /by Exit Strategies

Exit Strategies Group M&A Advisor Tony Westfall recently was hosted on Flippa’s “The Exit Podcast” where he shared his insights on growth acquisitions and the importance of scaling quickly.

Tony stated,  “I started my career as a big company corporate guy and then transitioned to being an entrepreneur.  I always knew that I really wanted to be involved in deal making though.  Even as an entrepreneur, my favorite activities were always acquiring other businesses.  When the Flippa podcast reached out to me to get my insights on exits from the perspective of an operator and an advisor, I was happy to oblige.  I think the best advisors are those who have been there before.  I made plenty of mistakes in my time as an entrepreneur, but I feel like those experiences are what help me and my colleagues come up with out-of-the-box solutions that enable us to maximize outcomes for our clients who are often doing the largest deal of their lives in the things they have spent a lifetime building.  Flippa caters to start-up communities, but of course, many of those lessons are applicable across the spectrum of companies.”

Listen to the podcast here.

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

Exploring Donor-Advised Funds for Privately Held Business Owners’ Philanthropy

/in , /by Joe Orlando

For business owners of privately held companies seeking a seamless and impactful way to contribute to charitable causes, Donor-Advised Funds (DAFs) have emerged as a philanthropic and tax-efficient solution. These vehicles offer a flexible and tax-efficient way to manage charitable donations, allowing donors to make contributions to a fund and then recommend grants to their favorite charities over time. Many people have successfully used DAFs to support the causes they care about, and there are numerous success stories available online.

According to the 2023 DAF report, contributions to DAFs reached an all-time high of $85.53 billion in 2022. These contributions have grown at a double-digit compound annual growth rate (CAGR) over the last five years, as detailed below.

Source: National Philanthropic Trust. 2023 Donor-Advised Fund Report

Even though DAFs are an effective tax-efficient vehicle to make contributions, special attention, and professional advice are required to obtain such tax benefits and contribute to a good cause. (NOTE: Exit Strategies does not provide tax advice but will work with your tax advisors to help value the assets contributed to a DAF.)

Contributions of Private Securities

Most of the valuations we perform for the transfer of equity to DAFs are associated with the transfer of private equity securities. These transfers into DAFs frequently occur immediately before a pre-arranged stock sale.

In these situations, the donor hopes to claim a charitable deduction for the full fair market value of the gifted stock. However, because the sale of private securities always has risk, a qualified appraiser must pay special attention to discounts associated with a lack of liquidity (or a lack of control and marketability) that lowers the value of the donation to the Fair Market Value at the date of the gift rather than the anticipated timing of the income to the DAF. The appraiser must analyze related documentation of the donation, such as the private company’s by-laws, an operating agreement, or a buy-sell agreement, to see if there are any transfer restrictions in support of these discounts.

Form 8283

The IRS requires Form 8283[1] to be filed with a tax return in support of the resulting tax deduction for the donor. This form needs to be signed by the donor and the recipient, as well as the certified appraiser, along with a thorough, USPAP-compliant report required by the IRS for their review.

IRS-Compliant Report

The IRS considers several factors while reviewing a business valuation report, including the completeness of the report, whether it adequately discloses the methodologies applied, and the information necessary for a reader to understand the report. The IRS assesses whether the appraiser possesses the necessary skills and credentials to conduct the business valuation.

If you are planning to contribute private equity or other illiquid assets to a DAF, professional advice and planning is critical. A team of advisors, including a tax attorney and your accountant, will help you navigate this process. ESGI would welcome the opportunity to be part of that team as the valuation expert who opines on the value of these donations. Our team of appraisers includes professionals with the ASA designation (an Accredited Senior Appraiser) issued by the American Society of Appraisers[2], and our opinions meet strict IRS requirements and have been successfully defended in IRS review.

Exit Strategies has certified appraisers who value control and minority ownership interests of private businesses for tax, financial reporting, and strategic purposes. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA, at 503-925-5510 or jorlando@exitstrategiesgroup.com.

[1] https://www.irs.gov/pub/irs-pdf/f8283.pdf

[2] https://www.appraisers.org/credentials/business-valuation

M&A Advisor Tip: Have the Discipline to Diversify

/in , , /by Exit Strategies

As a general rule, no single customer should account for more than 20-25% of your company’s revenue. While having major customers can be great for your bottom line, it represents substantial risk to you and the next owner.

As you build your business, pay attention to what potential buyers will want. They’ll be looking for well-diversified customer base where the loss of one account won’t have a major impact on earnings.  Do the hard work of diversifying, and you’ll increase business value.

For advice on exit planning or selling a business, contact Al Statz, founder and CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Are You an Expert at What You Do?

/in , /by Joe Orlando

So what is an expert and, more importantly, are you one? The term “expert” has many definitions. For anyone who has written a wedding toast or sat through a valedictorian’s speech you know how the next sentence starts…Webster defines an Expert as “one with a special skill or knowledge representing mastery of a particular subject.” If you click through the link you will notice an obsolete definition for the adjective: experienced.

This distinction is important to understand who can hold themselves out as experts in a particular field. In my field, Business Valuation, I consider myself both experienced and an expert. My certification as an Accredited Senior Appraiser through the American Society of Appraisers allows me to separate myself from other experts. For example, in valuing a business, a business broker may hold themselves up as an expert by applying pricing tools to determine the appropriate value of a business in a hypothetical transaction.

However, without the proper training and credentials, a business broker may rely on summary information for market multiples (i.e. the Business Reference Guide) and ignore the details of a transaction search. Without proper valuation training, they may also decide to exclude an income approach as a methodology better suited for a business generating strong cash flows. While the ASA, AICPA, and IRS standards dictate that my work as a credentialed appraiser meets the requirements of their compliance in opining to a value, anyone holding themselves up as an expert needs to follow a Federal Rule of Evidence Rule 702: Testimony by Expert Witnesses which states that;

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

  • the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
  • the testimony is based on sufficient facts or data;
  • the testimony is the product of reliable principles and methods; and
  • the expert has reliably applied the principles and methods to the facts of the case.

An Update and a Crackdown

However, an amendment to Federal Rule of Evidence 702 will take effect on December 1, 2023, to help clarify the qualifications of an expert witness. A crackdown using the terms of this amendment has already taken place with increased exclusions and reversals of a lower court’s decision to admit expert evidence. Here are the terms of the amended Rule 702 (changes either crossed out or in bold).

Amended Rule 702: Testimony by Expert Witnesses

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise, if the proponent demonstrates to the court that it is more likely than not that:

  • the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
  • the testimony is based on sufficient facts or data;
  • the testimony is the product of reliable principles and methods; and
  • the expert has reliably applied expert’s opinion reflects a reliable application of the principles and methods to the facts of the case.

While the above changes may seem minor, they are having an immediate impact on expert selection by attorneys and the exclusion of experts by judges. One of the top 50 law firms in the US, Perkins Coie, suggests that:

“While the rule has not changed extensively, the amendments clarify the standards federal courts should apply to the qualification of expert witnesses…In addition, counsel preparing expert witnesses may wish to ensure that the expert is prepared to defend the principles and methods used as appropriate and reliably applied to the given case.”

A Daubert Standard

Cornell Law School’s database of legal terms defines the Daubert Standard as follows:

“The ‘Daubert Standard’ provides a systematic framework for a trial court judge to assess the reliability and relevance of expert witness testimony before it is presented to a jury. Established in the 1993 U.S. Supreme Court case Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993), this standard transformed the landscape of expert testimony by placing the responsibility on trial judges to act as “gatekeepers” of scientific evidence.”

This standard was recently triggered in a bankruptcy case in South Carolina. The judge determined that the expert was qualified in this case but these challenges continue to occur.

Conclusion

I appreciate and respect someone with knowledge and experience holding themselves up as an expert. However, without the required credentials to pass the Daubert Standard test, I believe a judge, as the “gatekeeper” for the court, is more likely than not to exclude experts without an attorney appeal going forward.

Exit Strategies ten certified appraisers value control and minority ownership interests of private businesses for tax, financial reporting, and strategic purposes…and provide expert testimony. If you’d like help in this regard or have any related questions, you can reach  Joe Orlando, ASA at 503-925-5510 or jorlando@exitstrategiesgroup.com.