News & Articles

Myths and Truths about Business Valuation

Posted on Thu, May 16, 2019

The business valuation profession has grown rapidly since 1980. Over the decades, it has developed from a rudimentary process into a highly sophisticated mix of art and science to determine the value of a business or business interest. However, many business owners and investors fail to understand the valuation process and its results. Here are some common business valuation myths and the underlying truths.

Myth: You appraised the "fair market value" of my business. When I sell my business interest, this is the price I will receive.

Truth: Fair market value (FMV) is different from a transactional (or strategic) value. FMV is hypothetical. If you look at the definition, FMV requires consideration of the universe of hypothetical buyers and sellers. The resulting value determination can be looked at as a "most likely" value given the hypothetical considerations. A transaction value, on the other hand, is a verifiable amount, a price at which the business actually changes hands and not an estimate of value that is the result of FMV. Transactional value may be significantly higher (or lower) than fair market value, depending on the circumstances.

Myth: As a business owner, I have the best idea of what my business is worth.

Truth: While the business owner might know the most about their business, that knowledge alone isn't enough to qualify the owner to value the business. Valuation has developed into a profession with accreditations, standards, and professionals with experience and knowledge in how to determine the value of a business. The valuation professional also is an objective third-party. Business owners tend to view their businesses differently than outsiders -- often through "rose-colored" glasses. Owners need to understand how outsiders view the business -- because it's hypothetical investors that determine FMV.

Myth: If a business is worth $1 million, my 10 percent interest should be worth $100,000.

Truth: Owning a minority (or less than controlling) interest in a business diminishes the interest's value from the pro rata value of the entire business. A minority interest cannot determine policy, set compensation for officers and other owners, or decide when and whether to sell the business or significant assets of a business. There are many other items that cannot be controlled by a minority owner. The diminished value can be materially less than the pro rata value, depending on the facts and circumstances.

Myth: The owner's contributions to a business enhance the value of the business.

Truth: An owner's contributions often enhance the value of a business, but there's a major exception. Owners may possess talents, relationships or other intangible assets -- often referred to as "personal goodwill" -- that cannot be transferred to buyers. Owners who contribute personal goodwill diminish the value of the business to an unrelated party. For example, if the owner has contacts with long-term customers that are not likely to transfer to a new owner, the business will likely lose those customers when the current owner leaves the business. That, of course, will reduce the value of the business.

Myth: Value is value, so I can use a valuation report for multiple purposes. For example, I could use a report that is prepared for estate planning purposes to get a loan, settle a divorce or support value on a gift tax return.

Truth: A business valuation is prepared for a specific business as of a specific date and for a specific purpose. If any of those parameters change, the valuation is no longer valid. Different purposes for a valuation might require a different standard or basis of value. For example, the valuation of a minority interest for gifting purposes cannot be used to determine the asking price of the business when the owner wants to sell the entire business two years later. It's important that the user of a valuation report understand its use limitations.

To attain a better understanding of business valuation, owners and investors should discuss the valuation process and various options with an EHTC appraisal professional. Please contact Erik Olson at ErikO@ehtc.com or by calling (616) 575-3482.

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Tags: Valuation, Business Valuation, Business Owner

7 Year-End Tax Planning Moves for Small Businesses

Posted on Mon, Oct 29, 2018

Business owners still have time to significantly reduce their tax bills for 2018. Here are seven year-end moves to consider, taking into account changes included in the Tax Cuts and Jobs Act (TCJA).

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Tags: Tax Planning, Business Owner, Tax Cuts and Jobs Act (TCJA)

When Is Service Business Income Eligible for the New QBI Deduction?

Posted on Wed, Sep 12, 2018

The IRS has issued much-anticipated regulations addressing the new deduction of up to 20% of qualified business income (QBI) from pass-through entities. The QBI deduction was a major piece of the Tax Cuts and Jobs Act that was signed into law in December 2017.

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Tags: Business Owner, Qualified Business Income (QBI)

Is it Time to Rebid Your Vendor Contracts?

Posted on Mon, Aug 27, 2018

While it's great to have a good rapport with your vendors, it's important to ensure the relationship remains businesslike. Vendors who know there is a threat that they could lose your contract are more likely to focus on staying competitive.

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Tags: Business, Small Business, Business Finance, Business Owner

QBI Deduction Provides Tax Break to Pass-Through Entity Owners

Posted on Fri, Aug 24, 2018

The IRS recently issued proposed reliance regulations to help clarify the new qualified business income (QBI) deduction that was introduced as part of the Tax Cuts and Jobs Act. This guidance is complex and hundreds of pages long. As part of the proposed regs, the IRS explained that, if certain requirements are met, individuals, estates and trusts (all referred to as "individuals" by the proposed regs) that own interests in more than one qualifying trade or business can (but aren't required to) aggregate them, by treating them as a single trade or business.

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Tags: IRS, Business Owner, Tax Cuts and Jobs Act (TCJA), Qualified Business Income (QBI)

Make Your Workplace Drug Free

Posted on Thu, Jul 19, 2018

Employee drug and alcohol abuse can cost your company in many ways, including increased absences, workplace accidents and high health costs. In addition, studies show that drug users are five times more likely than other employees to file a worker's compensation claim.

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Tags: Department of Labor, Business Owner, Drug and Alcohol Testing

Recent Developments May Affect Passive Investors with Losses

Posted on Mon, Apr 10, 2017

Do you materially participate in a business or rental activity — or are you just a passive investor who isn't directly involved in a project's day-to-day operations? The IRS has prescribed seven tests to help individuals classify income, gains and losses from activities as passive or nonpassive. (See "PAL Basics" below.)

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Tags: IRS, passive activity loss, Business Owner

There's Still Time to Set Up a SEP for 2016

Posted on Mon, Mar 06, 2017

Simplified Employee Pensions (SEPs) are stripped-down retirement plans intended for self-employed individuals and small businesses. If you don't already have a tax-favored retirement plan set up for your business, consider establishing a SEP — plus, if you act quickly enough, you can claim a deduction for your initial SEP contribution on your 2016 tax return.

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Tags: SEP, Retirement Plan, Business Owner

Form 1099 Filing Alert

Posted on Tue, Nov 15, 2016

The IRS has been focusing on taxpayer compliance when it comes to reporting taxable income on Form
1099 and Congress has been increasing the penalties for non-compliant taxpayers. New this year,
penalties can range from $100 to $500 per 1099 return if filing with the Internal Revenue Service is
not completed by the compressed deadline of January 31, 2017.

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Tags: Tax, Business, IRS, Business Owner, Form 1099

Year-End Tax Strategies for Small Businesses

Posted on Fri, Nov 11, 2016
It's not too late to take steps to significantly reduce your 2016 business income tax bill and lay the groundwork for tax savings in future years. Here's a summary of some of the most effective year-end tax-saving moves for small businesses under the existing Internal Revenue Code. After President Obama hands over the baton to his successor and new members of Congress are sworn into office in January, the tax laws could change. But here's what we know now.

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Tags: Year-End Tax Planning Strategies, Business, Year-End, Year-End Planning, Small Business, Business Owner