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BES Newsletter
May - June 2010 |
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Business Evaluation Systems, Inc.
1700 F.M. 517 E. Suite A 281.337.1919 Phone
Dickinson, Texas 77539 281.337.1915 Fax
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Greetings,
Since 1973, Business Evalutation Systems has been involved in the appraisal of over 16,000 companies, covering almost every industry on a national and international basis, ranging in value from $50,000 to over $7 billion.
Our experience has qualified us to meet the requirements of the Appraisal Foundation, the Internal Revenue Service, lending institutions, and courts of law around the country. Two of the appraisals the company was involved in have passed the scrutiny of the World Bank. The appraisers in Business Evaluation Systems have sold over 1,000 businesses.
Sincerely,
Business Evaluation Systems, Inc.
**Please look for the "SHARE" button at the bottom of this newsletter if you would like to post these articles to any of your social networking sites (Facebook, LinkedIn, Twitter, and more). |
Business Valuation, An Analysis Of Risk
By: George D. Abraham
CEO and Chief Appraiser
Analyzing risk is the predominate factor in valuing a business. The appraiser must analyze every aspect of the business and quantify his or her analysis of the company's risk into value. A study of the significant risk factors in the business must be identified and then rated as to the degree of risk each carries. The following are some of the factors to analyze in a business.
Labor
There are many key factors to analyze as far as labor is concerned. Are employees hard to find? What educational skills or level is required and is the labor pool such that they could be replaced? If the company is highly technical, there may not be many individuals in the area that have those skills and thus make it difficult for the company to grow. On the other hand, many of these companies can outsource or use virtual offices with employees in any part of the country.
Are key employees and management due a significant salary increase? Again, many employees are faithful to the owner and feel that once the company grows a little more, they will be rewarded both in salaries and advancement.
What are the ages of the employees and key management? If many of the key managers are close to retirement age, they may just retire when ownership changes. After many years on the job and very close to retirement, many in management don't want the changes they perceive with new ownership.
What is the liability risk with the employees? Are the jobs they are performing such that accidents are a normal occurrence in the industry? If this is the case, have the employees been trained sufficiently in safety procedures? Is safety an on-going program for the employees? If the company has delivery vehicles, a check of the accident history is in order.
Management
Will key employees' stay once the company changes ownership? It is not uncommon for key employees to leave the company for a more lucrative position with a larger competitor. Many times, the key employees stay with the company as they are close to the owner and are in a position to contribute to the company's growth and success and feel they will be rewarded heavily someday.
Has management been efficient? Are they up to the challenges of the future? Many companies have employees that grew up with the business but now the company has outgrown them. They do not have the education or expertise to take the company to the next level.
How many of the key managers are relatives? If all or most of the key managers are relatives, and will be gone after the company sells, there is no management.
Who is responsible for the majority of sales? Does the company have a sales force or is the owner responsible for most of the sales and if so, how hard would it be to replace him.
Financial Strength
Is the company solid or are they in a cash crunch? Some ratio analysis can tell you what kind of financial position the company is in and how it compares to other companies in its industry. An analysis of the company's account receivables is necessary to see how they are getting paid. An abundance of slow paying customers can drain the company's working capital. Insufficient working capital can prohibit the company from growing because it can't buy enough raw materials or inventory to meet an increase in sales.
Does the company have the ability to buy from several suppliers or are they enslaved by one that can raise prices whenever they want? Another question that pops up is how stable is the supplier? Cost of sales is usually the largest expense for a company. If you have no idea what the future costs are going to be, you can't make any kind of meaningful future projections or budgets.
Facilities & Location
What is the length of the lease? Is it likely to increase? Are the facilities sufficient for the business and possible expansion? What about the company's location? Are any major roadways or changes in the area likely to affect the company?
Diversity of Accounts
If the company loses one or two accounts will they be out of business? Many companies have one account that equals a large portion of their business. Unless these large accounts are under contract for several years, a buyer may be hard to find. Will the accounts stay with a new owner is the heart of the analysis for the appraiser.
Competition
How strong is competition? What is the level of ease of entry into this industry? Are technological changes going to give a major competitor with more cash a significant advantage?
Predictability
What has the historical financial picture shown? What would it tell a buyer as to what he or she can expect in the future?
Marketability
How hard would it be to sell this company? How many buyers would be interested in this type of business? Does the company have a really unique niche? What is the future of its customer base? Do they manufacture sewing machines or medical equipment?
Future Outlook
Always remember that a business is bought on the assumption of its economic benefit to its owner. The more stable the financial future, as well as other factors like technological changes, environmental regulations, and public attitude, can have an effect on a buyer's emotion. This relates to how long the buyer is willing to risk his or her money and therefore how fast he or she would want it back and thus the multiple of earnings he or she is willing to pay.
In business appraisal, value has its basis in "anticipated future benefits" (earnings). What the company will do in the future is what its value is based on. The risk factors mentioned in this article are the key to the projections that have to be made in the appraisal process and are all critical points that the appraiser must consider.
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Special Payroll Tax Exemption Form Now Available
WASHINGTON - The Internal Revenue Service today released a new form that will help employers claim the special payroll tax exemption that applies to many newly-hired workers during 2010, created by the Hiring Incentives to Restore Employment (HIRE) Act signed by President Obama on March 18.
New Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is now posted on IRS.gov, along with answers to frequently-asked questions about the payroll tax exemption and the related new hire retention credit. The new law requires that employers get a statement from each eligible new hire, certifying under penalties of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. Employers can use Form W-11 to meet this requirement.
Most eligible employers then use Form 941, Employer's Quarterly Federal Tax Return, to claim the payroll tax exemption for eligible new hires. This form, revised for use beginning with the second calendar quarter of 2010, is currently posted as a draft form on IRS.gov and will be released next month as a final along with the form's instructions.
Though employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file these statements with the IRS. Instead, they must retain them along with other payroll and income tax records.
The HIRE Act created two new tax benefits designed to encourage employers to hire and retain new workers. As a result, employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer's share of social security tax on wages paid to these workers after March 18. This reduction will have no effect on the employee's future Social Security benefits, and employers would still need to withhold the employee's 6.2-percent share of Social Security taxes, as well as income taxes. In addition, for each unemployed worker retained for at least a year, businesses may claim a new hire retention credit of up to $1,000 per worker when they file their 2011 income tax returns.
These two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify for either of these tax incentives.
Businesses, agricultural employers, tax-exempt organizations, tribal governments and public colleges and universities all qualify to claim the payroll tax exemption for eligible newly-hired employees. Household employers and federal, state and local government employers, other than public colleges and universities, are not eligible. IRS.gov has more details.
Related Item:IR-2010-33, Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers
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Another issue when buy-sell agreements are present: Can they bind the non-shareholder, non-signing spouse?
In a case of first impression, the Texas Court of Appeals considered a buy-sell agreement that purported to bind shareholders and their spouses in the event of divorce. As a further complication, the husband had signed an employment agreement with the private medical association-but neither he nor his wife had signed the shareholders' agreement. This unsigned agreement limited the value of a divorcing shareholder's interest to the equity buy-in price (in this instance, a mere $11,000 for a 25% share in a business with an estimated $3 million to $5 million book value).
In a pre-trial hearing, the trial court precluded the wife's expert's testimony about the husband's share in the P.A. ($794,300 book value to $1.1 million fair market value) and ruled the buy-sell agreement was binding. The wife appealed, citing Texas cases in which partnership buy-sells were just one of many valuation factors to consider. But these cases concerned partnerships, the Court of Appeals held, and they did not address the specific event of a partner's divorce. In this case, the medical association was akin to a private, closely held corporation, and even though the wife didn't sign the shareholders' agreement, it offered evidence of market value-as did the prior buy-outs of three former members, all at the $11,000 contractual price. The marital community owned an interest in the shares of the association, the court held, as part of its reasoning, "and not an interest in the association as an 'ongoing business'."
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