| Business Evaluation Systems |
|
|
BES Newsletter
March - April 2012 |
|
|
|
Business Evaluation Systems, Inc.
1700 F.M. 517 E. Suite A 281.337.1919 Phone
Dickinson, Texas 77539 281.337.1915 Fax
|
|
Greetings,
Since 1973, Business Evaluation 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). |
CEO & Chief Appraiser
Business Evaluation Systems
The Direct Market Data Method (DMDM) relies on the principle of substitution. A buyer will not pay more than the price at which he can obtain an equally desirable substitute.
The DMDM method uses parameters of comparison in the form of income multipliers. They can be multipliers of income, either gross net or discretionary cash flow. The three most popular databases which supply the transactional data are; Institute of Business Appraisers (IBA), BizComps and Pratts Stats.
When attempting to value a company using the Direct Market Data Method (DMDM), it is not uncommon to experience a wide range in value between the Price to Discretionary Earnings (P/E) and Price to Sales (P/S). In using the transactional data, one must remember that we are comparing businesses and in most cases, these are complex entities. Unlike real estate, whereby land and improvements can be measured fairly accurately using a comparison of price per square foot, businesses are much more complex and have many variables that can have a significant impact on value. There are several reasons for the wide ranges that occur between the two multiples when using the databases.
The three databases obtain their data mainly from business brokers and other intermediaries. The reporting systems for each of the databases are not standardized and some are limited regarding details of the transactions. The fundamental problem in collecting data is the reporting forms supplied to collect the data. Business sale structures can be very complex, forcing the broker to elaborate on the form in order to describe the input, especially when it comes to the selling price. Many sales contain exchanges, earn-outs or an additional price based on some contingency and forces the business broker to elaborate when the reporting the selling price of the business. The person inputting the data into the database is faced with deciding the selling price. Unfortunately, the industry lacks consistency in common terms such as owner's discretionary cash flow and net income (before or after tax). The BizComps database removes the inventory from the selling price, but many times sales include inventory and is not mentioned or if mentioned, no inventory value is given. Inventory values given to the other databases and included in the price, have usually not been valued or even counted for accuracy. In my experience, the Sellers value of the inventory is almost always incorrect as it does not include adjustments for slow moving, never moved or dead inventory. Adding to the dilemma on inventory is FIFO and LIFO accounting.
The sales contained in the databases were sold as asset sales and generally do not include current assets or liabilities, but many times to make the sale, the owner will include the receivables and/or allow the buyer to assume some of the liabilities.
Another problem with reporting the sales consistently are real estate and improvements. Companies in the databases do not include real estate and improvements and a fair market rent has been deducted from the company's earnings, but was the rent used really fair market?
Location of business is given only in terms of general geographic area which could have a significant effect on value for some businesses whereby location is paramount to success.
In other cases, the sales with high multiples are not arms length and the business was purchased based on acquiring a valuable location or a competitor paying over market value to eliminate a major competitor. As many Baby Boomers are retiring, they are transferring the businesses to sons and daughters and these may also not be at arm's length.
Another problem, which in my mind is significant, is that prior revenues and earnings are not provided. Without a history of the company's historical performance we do not know if the Company was in rapid decline or significantly increasing in revenues and earnings. Despite the reporting problems inherent in the databases, if analyzed correctly, the data is very valuable. The least it can do is set a range of multiples that you can narrow down.
Business appraisers will sort the sales in the databases according to revenues and then choose a group which contains sales that are close to the company or a sales range which would not change the operating ratios significantly. Once the comparable group is established, the companies in the group need to be carefully analyzed to their closeness to the subject company. Companies whose sales to earnings ratios are significantly different than the subject should be discarded. A close look at the location should be made if that is important and the date sold. I think it is safe to say that most people feel that there was a world of difference in business after the beginning of 2009. However, before you form this conclusion in your analysis, take into consideration that all values are derived from anticipated future performance. As we all can remember, interest rates were extremely high back then and required return on investment had to compensate for this, this and the higher the return required, usually the lower the value. Currently interest rates are at an all time low and the required return is much lower so in some cases the older sales may not be that different. |
 |
|
IRS Audits of Small Business Software
Practitioners should balance risk for their clients
Journal of Accountancy
Tax practitioners have always been cautious with the records they provide to the IRS in an audit to control the depth of an IRS inquiry. But IRS agents are starting to request client backup files from small business accounting software such as QuickBooks and Peachtree, and many practitioners are concerned about how much information the IRS is requesting and how it is using that information.
This article explores the IRS' legal authority and long-standing use of electronic records in audits and takes a closer look into how the IRS requests and uses electronic files. It offers tips for CPA practitioners in responding to IRS requests for small business accounting files and for their clients in adjusting bookkeeping practices to minimize undue IRS inquiry during a small business audit.
In October 2010, partially at the request of tax practitioners during IRS focus groups, the IRS announced it was expanding its audit capabilities by training agents to be proficient in auditing information from files of accounting software commonly used by small businesses. According to the IRS, it has trained 1,100 revenue agents and has given them copies of the software to become proficient in using them and other programs in the future. It also encouraged agents to start requesting electronic files from taxpayers and practitioners. According to the IRS, the push to start using small business accounting files in audits originated with feedback from tax practitioners in 2008 focus groups. Practitioners indicated they wanted the IRS to be more efficient in examining records and reduce the volume of paper involved in audits. The IRS saw this as making audits more efficient for its agents as well.
IRS AUTHORITY TO REQUEST ELECTRONIC RECORDS
It's clear in IRS regulations and precedent that electronic records can be requested and used in audits. Sec. 6001, Regs. Sec. 1.6001-1(a), Rev. Rul. 71-20 and Rev. Proc. 98-25 give the IRS broad authority to examine electronic records to establish the taxpayer's correct tax liability. Regs. Sec. 1.6001-1(e) requires the taxpayer to make these records "at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law." Rev. Proc. 98-25 clarified that the IRS has a right to electronic records.
The taxpayer must provide the electronic records upon request. If a taxpayer attempts to withhold them, the IRS may disallow all of the items that are unsubstantiated as a result of the decision to withhold the files-or it may summon the records.
SUMMONS POWER UPHELD
In June, the IRS prevailed in a summons enforcement case in U.S. District Court (Rouse, No. 8:11-MC-00046-T-24AEP (M.D. Fla. 6/27/11)). The IRS had requested the taxpayer's QuickBooks backup files. The taxpayer refused to comply, and the IRS enforced the summons. The judge in the case summarily ordered the taxpayer to turn over the records to the IRS, citing......To read more, click on the logo
|
 | |
Iowa Rejects Rule of Thumb Business Valuation in Divorce
Post by Family Law Source
A recent decision of the Iowa Court of Appeals illustrates the perils of reliance upon industry rules of thumb to value a business in matrimonial litigation. In Marriage of Hagar (11/24/2010), husband and wife purchased a dry cleaning business from a trust established by husband's parents as part of a business succession plan. Husband and wife agreed to a $300,000 purchase price that was determined by the companies' accountant. The trust took a promissory note for the purchase price. The opinion does not describe the technique by which the accountant estimated the company's value, but there were adjustments to normalize the excess rent and excess interest paid by the dry cleaning business to the real estate company (which the parents' trust continued to own).
Over the years, the dry cleaning business struggled. The payment terms were modified to maximize the seller/parents' tax benefit and to accommodate the buyers' inability to pay the notes. For instance, the dry cleaning business began to make quarterly distributions to pay the notes in lieu of salaries for husband and wife...... To read the balance of the article, click the logo below.
 |
|
| |
|
|
|
Business Evaluation Systems
If you are interested in finding the true value of your business or machinery & equipment, we can help. We offer fairly priced appraisals with a quick turn-around time. Call today to find how our dedicated staff can help.
Business Evaluation Systems, Inc.
1700 F.M. 517 E. Suite A
Dickinson, Texas 77539
Business Evaluation Systems, Inc.
281.337.1919
|
|
|
|
|
|
|
|
|
|
