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A good deal depends on preparation: CPAs can help client-owners of closely held entities tidy up their businesses for a sale.

Article Excerpt
Even the most workaholic proprietors eventually want to take it easy, develop an exit plan and turn their business assets into cash. The decision to let go is a big one, and a CPA business valuator can help the client sell the company on the most advantageous terms by working with the individual early in the process--a few years in advance for a long-term client. The value of an entity is based on a number of factors including its financial statements, equipment, real estate and location, and practitioners help owners prepare for an appraisal on several fronts. The process may involve reducing discretionary expenses and increasing the scope of the financial statements by moving from a compilation to a review or a review to an audit. This article describes some ways CPA/valuators can improve terms for owners of closely held businesses who prefer to sell.

WHO, WHY AND WHEN INFLUENCE OUTCOME

To execute a succession plan, your clients need a business valuation (BV), an exit strategy and some guts. Often their lives are so wrapped up with the business they never see themselves separating from it. So it's essential to get a client to sit down and discuss the logical steps of what he or she needs to do to prepare. Help the owner choose an exit plan that meets his or her personal goals and the business's capabilities. The top two succession objectives of most business owners are maximizing their financial return and minimizing their tax liability. Third on the list is protecting the company's future viability to minimize risk to a new owner so it continues and pays the owner's buyout.

The three chief approaches to valuing businesses are the market approach (what others have paid for comparable businesses), the asset-based approach (essentially the cost to recreate the operating assets of the client's business) and the income approach (how much a buyer could make from the business). A practitioner should answer two key questions at the outset of a BV engagement:

Value to whom? CPA/ABVs choose their valuation approach based on the client's intended audience. Different objectives lead--quite honestly--to different results. A proprietor wanting to give an ownership stake to children or whose estate has a business that needs to be valued for tax purposes is concerned with succession planning. The client passing equity to a junior generation must follow IRS revenue ruling 59-60, 1959-1 CB 237, section 2.02, which requires a gift and estate tax valuation to be based on "fair market value" (FMV, paraphrased as worth to a buyer anti seller under no duress). The IPS allows family-owned and operated businesses to apply lack-of marketability and minority-interest discounts that shave a fair amount off the value for such wealth transfers.

If the client wants to sell the business to a third party for the maximum the market will bear, the buyer wants to know its "investment value." For this the owner evaluates--and substantiates--the company's worth. Investment value hinges on synergies with a buyer, so the CPA/ABV includes the characteristics of one or more buyers in the analysis.

As of what date? The seller's company represents one of many investment opportunities for a buyer, so a valuation has a short shelf life. Market conditions are fluid, and when they change, so do interest rates and the return on investment both buyer and seller require. Changes in industry conditions also can alter investors' sentiments. For example, a valuation of a supplier to the airline industry would be dramatically different pre-and...

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