Thomas Kretschmar: Valuation

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Thomas Kretschmar, CPA, CVA, is an Assurance Partner. He has over 30 years of accounting experience, including five years as a chief financial officer in private industry. He was first employed at White Nelson 1980-83, and returned to the company in 1988. He has been a partner since 1998.

Thomas earned his B.S. degree in accounting from San Jose State University in 1979 and his CPA designation in 1982. In 1997, he received a Certificate of Educational Achievement in Business Valuations, American Institute of Certified Public Accountants. In 2009, he received a CVA designation from the National Association of Certified Valuation Analysts.

He has a diverse background, including audit and accounting, business valuations, tax and other management advisory services. He has expertise in manufacturing, distribution and experience in other business sectors where he has provided relevant accounting and management consulting services.

He recently discussed the topic of valuation.

How can a business owner determine the value of his business?
That is the age old question business owners ask themselves every day, especially when times are tough. The simple and accurate answer is “it depends.” The value of a business is dependent on a number of complex issues. Some of the most important factors when determining a value of an enterprise are the purpose of the value, the basis of value and the premise of value.

Why might a business owner seek out valuation services?
For many purposes, including:
• mergers and acquisitions
• company buy-sell agreements
• gift and estate tax or income tax transactions
• fairness opinions
• transfer of ownership and compensation issues
• generally accepted accounting principles (GAAP) compliance
• charitable contributions

How do you determine the basis of value to be used?
The basis could be fair market value, as defined by the IRS or international business valuation definitions, fair value, which includes most states’ statutory value definitions and financial statement GAAP’s definition, contract value or strategic/investment value. Another important factor is the premise of value which is normally a going concern value but also includes book value, orderly or forced liquidation value and replacement value. An experienced business valuator would arrive at a different value for a business under each of these purposes.

With what values are business owners most concerned?
The one value that most business owners are concerned with is the amount of money they would receive if they sold their businesses. Again, the amount will vary depending on factors such as size, profitability and financial stability of a company, the industry in which it operates and the type of business, whether a manufacturer, distributor or service organization. Also, the terms of a sale such as for cash or stock affect the selling price, as well as the type of potential buyer.
Many owners of businesses hear, normally second hand, that the business is worth a range of X times pretax earnings or X times EBITDA or fair market value of assets plus a goodwill amount, and most owners believe that their business is always worth the high end of the range, regardless of the condition of the business. But valuing a business for any purpose is much more complex. In 1959, the IRS issued a detailed analysis on the various factors that must be considered when valuing a business and that document is still one of the most prevalent and relied upon sources when valuing a business today. The factors listed by the IRS that require consideration when valuing an entity are too numerous to discuss briefly, but suffice it to say the simple answer is not the industry rule of thumb that the guy down the street sold his business for.

What key factors determine what amount an owner will receive for his business?
Two of the most important factors are who the potential buyer will be and the terms of a sale or transfer transaction. Strategic buyers, buyers that are usually in the same line of business as the seller, normally are willing to pay more for a company than financial buyers, investors that are looking for a return on investment where they will have less involvement in the acquired business. The strategic buyers will normally gain an economy of scale, which is not available to the financial buyer, and will gain market share or a competitive advantage from the acquisition.

For most business owners, the sale of their company to a strategic buyer will normally be the easier transaction and net them the most money, as the buyer is already familiar with the industry. Also, whether an owner receives all cash, carries back a note, negotiates an earn-out or receives common stock in a merger transaction will greatly affect the price that will be received. Each type of transaction and the associated terms have more or less risk for a seller and buyer and risk always is evaluated when determining price.

What experience does WNDE have in providing valuation services?
We have extensive experience and are recognized in our industry for our expertise. The best way to get started is to give us a call, and we’ll sit down and discuss your particular situation.

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