During the course of building and operating your small company, you may want to know the value of your business for several reasons. For young, high-growth companies with an inclination to issue incentive management compensation in the form of stock options, the most common reason is compliance with IRS code (409A). This tax compliance requirement establishes fair market value (FMV) at the time, or reasonably close to the time, that stock options are issued to management or employees.
There are also several other reasons for having an independent, fact-based, expert-led analysis of the fair market value of your business. These include, for example:
- Purchase or sale of ownership between one or more existing shareholders
- Consideration of a merger or sale of the company
- Developing a succession plan involving the transition of ownership over time to a trusted senior manager
- Consideration of an equity investment by an investor who will value an independent appraisal
- Execution of a merger or acquisition involving allocation of purchase price consideration to the opening balance sheet of the go-forward company
- Dispute resolution or litigation support in the case of conflict or disagreement between owners
- Estate and gift taxation compliance
- Developing a deeper, more analytically-based understanding of what specific operating and financial metrics drive value for strategic planning purposes.
The cost of a professional business valuation can traditionally range from $5,000 to $25,000+. Typically, a valuation project is quoted on a flat fee basis once the details and parameters are established. The cost to perform a business valuation can vary significantly based on the circumstances and the nature of the firm doing the valuation.
Factors playing a critical role in determining what you are likely to pay for a business valuation include the following:
- Purpose of a valuation. The purpose of a business valuation can be a major driver of appraisal cost. For example, valuations meant to be used as informal or preliminary pricing benchmarks for buyers or sellers of family-owned businesses require less work from the valuation expert and may cost less. On the other hand, valuations meant to be used in large-scale, complex litigations usually require a lot more work from the appraiser and can cost more.
- Documentation level. A related factor can be the parameters of the “deliverable” itself. For example, you may require summary analysis and a rich discussion with the valuator to really understand the drivers of valuation and why the final number landed where it did. Or, you may require full documentation in the form of a 50 page report for your files (and ultimately for IRS scrutiny should your company or shareholders be audited).
- Nature and complexity of the business being valued. When estimating the cost to perform a valuation, a business valuation expert considers a particular industry and category of business, associated regulatory requirements, a company’s structure (single entity vs. holding company; single unit or multiple subsidiaries or other multi-tiered entities), a company’s size (global vs. domestic enterprises), the structure of an interest being valued (common, preferred and treasury shares), a company’s capital structure (simple or complex with various classes of securities), effect of the imminent stockholder action, and other factors.
- Availability of important information. Costs can increase if the valuator is required to assist the company in developing or compiling critical information, e.g., income statement forecasts
- The urgency of an engagement. A business valuation is typically completed within three to six weeks from the day the appraiser receives all requested information. Valuation fees may be higher for urgent engagements that require a quicker turn-around,
- The size and nature of the valuation firm. Global/national CPA firms obviously serve very large companies on complex corporate finance and accounting issues and can be extremely expensive accordingly. Examples might include E&Y, PWC, Grant Thornton, Deloitte, etc. On the other end of the spectrum are smaller boutique firms who serve smaller or middle-market companies and deliver essential corporate finance/accounting services with appropriate affordability. Scale Finance LLC is a good example. In the middle are CPA firms of varying sizes, specialty business valuation firms of varying sizes, and independent experts with enormous experience with similar companies/situations.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.
