“Just give me your “back of the napkin” opinion about the value of this business.”
This is how some conversations begin. Perhaps someone wants to buy your business. Or maybe you’re interested in selling an interest to one of your key employees. A business in town is up for sale and you want to know how to strike a deal with the owner.
While you shouldn’t expect a valuation professional to figure out the value of a business on the back of a napkin, do you really need to pay for a valuation report? Maybe not. You may be better served by investing your time and funds in more important issues.
I’ve received a good number of calls from business people who tell me they need to have their business valued. Many times, though, I find that the reason for their call relates to one of the situations described above. While we can certainly provide them with a valuation report, the fact is that it will usually be overkill for what they really need.
And what is it that they really need? More often than not, it boils down to education and information. Business owners are much better off spending time on discussing how a business is valued.
- What drives the value of a business?
- What factors are considered?
- What about the assets owned by the business? Which ones are included in the value of goodwill or “blue sky” and which ones should be added to that value?
- What are rules of thumb? How do they relate to the business’ particular industry?
- What adjustments should be made to earnings?
We also talk about deal structures and how they relate to the ultimate sales price.
- Is it an asset sale or a stock sale?
- What are the terms of payment (cash, debt, both)?
- If debt, what are the terms of the loan?
- What are the buyer’s expectations of the seller’s continuing involvement in the business?
- Will the seller be paid for these efforts?
- What are the tax effects of various deal structures?
I find that, once these discussions have taken place, the mechanics of coming up with a fair price between the buyer and seller are usually much simpler. The parties are often able to come up with a negotiated price on their own. When it comes down to it, a valuation analyst is required to gain an understanding of the business and industry, the current economic trends, and the business management structure. Usually, these are things that the buyer and seller already know.
As valuation professionals, we can also provide a lot of information from the resources we have available to us, such as industry benchmarks, transaction details from sales of similar businesses, salary information, etc. Business owners find this information to be very valuable in making decisions.
Does this process always result in a smooth process where everyone is happy with the settled price? Of course not. Very often one or both parties decide not to move forward with the deal. Perhaps the seller needs more time to put his house in order so he can command a higher price. We can then spend our time on improving the structure and systems that can optimize the value of the business. The cultural basis of the business may not be a good fit between the buyer and seller. The price may be fair, but the wheels may fall off the business if too many changes are put into effect. Avoiding a bad deal is just as valuable as entering into a good one. Maybe more so.
So, do we ever prepare valuation reports for these types of engagements? Yes, but in most cases they are structured as limited-scope “calculations of value” as opposed to a full-scope “opinion of value”.
When engaging a valuation professional, it’s important that you get what will ultimately help you accomplish what you want. And sometimes, that starts on the back of a napkin.
If you’re in the construction business, you know that sometimes all that stands in the way of you and a big project is a little cash flow. Our construction clients often ask us if their companies are decent candidates for bank loans, especially if they’re looking to finish big projects and need cash.
“People often think the worst because they’ve been unprepared in the past, are out of money and don’t have their paperwork prepared to respond to bank requests in a timely manner,” says Partner and Construction Team Lead Ian Grimbleby.
Clients who are very organized and prepared are attractive candidates for bank loans, Ian cautions that timing is the bigger challenge — often, when you need a loan, it’s because you’re in a bind, and you might not have the proper information at hand.
At Grimbleby Coleman, we’ve helped many construction clients put their best foot forward before applying for a loan. Here are our top tips.
Get up to date. Be prepared — your bank may hit you with requests that require up-to-date information, and they will need it quickly. Make sure you have your most current financial statements before you head to the bank. Ian cautions, “Would you bid a job unprepared? Treat the bank like a new customer or job, because that is what you are to them and they are going to evaluate you.”
You should always have relevant financial information on hand, including information from the past 6-12 months. A tax return won’t be enough information for financing, even if you’re simply looking for cash to purchase equipment for an upcoming job.
Know what’s important. The bank will evaluate key performance indicators (KPIs) such as working capital, interest coverage, profit margins and return on assets compared to the industry benchmarks. Of course, it is good, sound protocol to keep these financials current even if you aren’t looking for a loan. However, your bank definitely will want to see a list of assets that can serve as collateral. “If you have current assets (receivables and inventory) and equipment, but you’re just cash poor, you’re probably a good bank loan candidate,” Ian says. “If all your assets or equipment is financed and there is little equity in the business (for whatever reason such as losses or you pulled cash out), the conversation with the bank is going to be tough.”
Don’t be afraid to ask for help. It takes discipline to maintain good quarterly financial statements. Make sure your company’s financial statements are intact each month, and take the time to analyze and reconcile your financials. Go the extra step to make sure more than just your cash, accounts payable and receivables are accurate. You will need to understand the health of the entire balance sheet including fixed assets, payroll liabilities and notes payable. If you or your bookkeeper are falling behind or need assistance, our team is here to help get you back on track. Please give a member of our Construction team a call before your next loan meeting.
Our ag clients are typically multi-generational, and most of them came into the business as youngsters, often helping grandparents and parents with odd jobs. Farm life offers children many benefits: a strong work ethic, the opportunity for teamwork, important skills — even another language!
“We encourage our clients to take their children’s involvement a step further by properly compensating them and planning ahead for their futures, which can be extraordinarily helpful from both the taxation and college financing perspectives,” mentions Chad Van Houten, Senior Manager and CPA. “The work you do now could help set up generations of success.”
PAY YOUR CHILDREN
Be sure you pay your children an actual wage so that you can shift some of your business income to a lower tax bracket. Depending on your business structure, you may be exempt from payroll taxes when paying your children under the age of 18. We often recommend that our clients pay their children just below the filing requirement, or be really creative and pay their children higher than a nominal amount – but with a catch! This money should be used to contribute to a savings plan, such as an IRA (including Roth IRA), or to contribute to a 529 college savings plan. Keep in mind Roth IRA and 529 contributions are not pre-tax, which can be tricky. You still want to claim your child as a dependent, so it’s critical to work with your financial advisor to strategically explore other types of education or retirement plans.
HEALTH SAVINGS ACCOUNT (HSA) PLAN
Enrolling in an HSA plan, with a higher deductible, makes good financial sense for young farmers. The HSA acts as a pre-tax savings account for people who are enrolled in a high-deductible health plan. Funds contributed to an HSA account are excluded from wages or deducted from income and can even be made after year-end for additional planning opportunities. Often times, younger people opt for higher-deducible health plans, but can still find themselves paying a significant amount of money out of pocket due to the higher co-pays and deductibles. This is where HSA accounts come in handy and are especially helpful for a large one-time medical expense in the year, such as the birth of a baby.
AVOID THE “KIDDIE” TAX
Be sure to work with a member of our accounting team when planning your children’s fair wages to avoid unknowingly creating a filing requirement. You want to be sure and avoid the “kiddie tax,” which according to the IRS occurs “If the child's interest, dividends, and other unearned income total more than $2,100, part of that income may be subject to tax at the parent’s tax rate instead of the child’s tax rate.”
You may want to consider term life or disability insurance policies to cover the period of time when the kids may be too young to farm and earn an income if something were to happen to the parents.
Also, it is almost never too early to start thinking about your trust and estate plan. Creating a living trust to own the farm real estate may help avoid the public governmental probate process in the unfortunate case of the parents passing.
Remember, there are many grants and educational resources available through the USDA. Be sure to take advantage of all your options! Specifically, be sure to check out Special financing for new farmers through to the extended Farm Bill. The renewed farm bill allows down payment assistance up to $300,000 at a 1.5% interest rate if you qualify as a new farmer.
Please be sure to give Chad Van Houten or another member of our Ag team a call to discuss any of these suggestions!
When it comes to identity fraud during tax season, we have good news and bad news.
The good is that we can quickly identify and anticipate when it has happened and jump into “damage control” action. The bad news — well, it happens. Increasingly, clients are experiencing this devastating crime. During tax season, thieves will try to snatch your refund. And, unfortunately, it’s a long and rocky road to repair the problem.
How do you know if you’ve been hit with identity fraud?
We usually discover identity fraud when we try to file a return for a client. We’ll receive a message that alerts us that someone has already used the client’s Social Security Number to file; since only one social can be used per filing, this is a huge red flag. “Unfortunately, identity fraud is discovered when we file tax returns,” says Linda Bossard. “In fact, several of our clients have had this challenge. It is difficult to work through, but we do it.”
Earned income credits that have been filed because of a fake W-2 are another tricky issue. If you file and can claim earned income that you didn’t actually earn, scammers have figured out how to reroute your refund. The IRS now requires employers to file W-2 information sooner so they can begin matching W-2 information with claims.
Tips to avoiding Identity Fraud:
- Protect your Social Security Number.
- Don’t give in to email phishing scams by email or phone.
- Remember that the IRS will never call you or email you! If you do receive a call or email, it’s most likely a scam, particularly if the person sounds hostile.
- Protect yourself! Lock your credit card, check your credit regularly, and use a Social Security protection site such as LifeLock.
- Contact the three national credit bureaus (TransUnion, Equifax and Experian) to secure/lock your credit.
What to do if you are the victim of fraud:
Immediately contact the Identity Protection Specialized Unit (IPSU) of the IRS. If it has been a year or longer since you filed and you have not received your refund, the IPSU can help you. Our team can manage this if you grant us Power of Attorney (POA) privileges.
- Download the Identity Theft Affidavit (Form 14039) from the IRS and fill it out.
- Contact credit reporting agencies.
- File by paper (otherwise the IRS will think you’re filing twice) and explain that you are a victim of identity theft. (You will then be issued a PIN to use for the next year.)
The IRS is working to improve Electronic Fraud Detection Systems (EFDS) data to determine true social security number owners, eliminating time-consuming research and making the process more efficient. Also, rumors are circulating that the IRS may be thankfully starting a new program called “The Identity Theft Commission” to help avoid these fraudulent crimes.
If you are concerned you may be a victim of tax-related identity theft, Linda Bossard or one of our accounting team-members will be able to help out. Contact us at 209-527-4220. Stay safe this tax season!
February 18, 2016
How Construction Project Managers and Bookkeepers are Saving Time and Money with "the Cloud"
One of our clients, CDC Construction, has adopted a mobile friendly strategy to manage time card processing using Edifica, a cloud-based project management software tool. Owner Seth Cheek mentions, "I am always thinking about how we can make the business more efficient and productive. Our industry is moving towards being more mobile, and we are too. With a little time and consistency, mobile management will become second nature, just like wearing a hard hat!"
Construction team-members Ian Grimbleby, Adriane Reams and Javier Padilla (L-R)