BV Girl - Business Valuation Blog

The concept that closely held business owners can increase the value of their businesses is nothing new. Yet many owners fail to take the basic steps that could make their companies more attractive to buyers. On January 8, 2008, Arden Dale sounds the alarm in his Enterprise column for the Wall Street Journal Online, that entrepreneurs who think they will cash out at retirement may be in for an unpleasant surprise. Dale goes on to say, “Small businesses often lack key elements that buyers look for — such as proper financial records or detailed documentation about how the business runs. Moreover, lots of owners go into the selling process without researching the market, so they have unrealistic ideas about the price their business will fetch. The result: It can take much longer than expected to close a sale — sometimes years.”

This issue is certainly one of interest in the business valuation community. Chris Mercer, noted BV author and speaker, has addressed the issue in his blog, Mercer On Value, and with a teleseminar titled “Is Your Business Ready for Sale?” Two other respected BV authors, Jim Rigby and Mike Mard, covered the concept of maximizing shareholder value in their book “Driving Your Company’s Value.”

Business appraisers know that one of the determinates of value for a company is the industry in which it operates and its position within that industry. You can have great management, capitalization, and marketing but if your industry is collapsing your company is going to be in trouble.

Last fall, the folks over at Entrepreneur pulled out their crystal balls and announced their picks for industries facing extinction in the next ten years. The list included the expected (record stores and film manufacturers) and the unexpected (gay bars?). In my mind, some industries on the list, like telemarketing, can’t go fast enough but I do hope they are wrong about newspapers. In any case, the article is worth a read for business appraisers who want to be aware that some clients may be in trouble.

The Appraisal Foundation has released the latest edition of Uniform Standards of Professional Appraisal Practice, effective for 2008 and 2009. This is a change from the annual USPAP edition to one that is effective for two years. The new version comes with “guidance” in the form of advisory opinions and frequently asked questions.

On December 4, 2007, the Financial Accounting Standards Board (FASB) issued FASB Statements No. 141 (revised 2007), Business Combinations.  According to FASB, “Statement 141(R) improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.” The revision of 141 is part of the FASB’s push toward “fair value,” or mark-to market accounting.

Financial Week (December 10, 2007) reports that Dennis Beresford, a former FASB chairman now serving on a Securities and Exchange Commission advisory committee that is studying the U.S. financial reporting system says “The rules will be difficult to apply and will require companies and analysts to relearn a lot of things.” The article goes on to say that the revisions to 141 “essentially extend the fair-value requirements to new areas. That will increase the valuation work required of corporate finance departments, and in some cases jack up the volatility of reported earnings as various assets and liabilities are marked to market.”

 The most talked about issue at the recent AICPA Business Valuation Conference in New Orleans had to be the new AICPA Business Valuation Standards. Definitely a “top of mind” concern for CPAs who face implementing the new standard officially know as Statement on Standards for Valuation Services No. 1 (SSVS No. 1) “Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset” on January 1, 2008. This concern was reflected in the questions asked in the general session at the conference devoted to this topic. Moderated by Ed Dupke, the panelists who included Jim Alerding, Mike Crain, and Jim Hitchner, answered questions about implementation and the potential conflicts with standards of other appraisal organizations. The session was very informative as moderator and panelists had all been involved in drafting the standards and could speak to the intent of standard.

As with many issues, it became clear in this session that many concerns about onerous requirements to meet the standards or conflicts with other standards were unfounded. The standards codify the practices that most good practitioners already have in place and a careful reading of the standard shows it to be compatible with current valuation practices.

The full text of the standard along with information on implementation can be found on in the Business Valuation and Litigation Services Center on the AICPA web site.