Owners don’t perform a collection agency valuation just because they feel like it. Between planning for the future, preparing to sell, and avoiding tax overcharges, there are a multitude of reasons for getting a valuation. The following are common situations and reasons for which valuations are conducted.
A valuation for estate planning purposes examines the business under its current structure, with some adjustments made to remove excess expenses or bring compensation to fair market value levels. When no major changes, such as a sale, are being contemplated, this tends to be the most common purpose for a collection agency valuation.
Selling Your Business
This is when most owners look to a business valuation to establish a basis for themselves or their partners prior to a partial or outright sale of their business. In this situation, a valuation provides a conclusion of value that is expressed as a single number, or a range of values. This is useful for determining the fair market value of a business and aiding in the negotiation of deal terms and structure with a perspective buyer.
The valuation of a business on the basis of a potential sale for 100% equity likely leads to the greatest value because it incorporates synergistic opportunities into the equation, like the adjustment of inflated salaries. A sale for a non-controlling (or minority) interest, on the other hand, may yield a lower value because it includes discounts for lack of control and marketability.
Transitioning to an Employee Stock Ownership Plan (ESOP)
ESOPs are popular among business owners for reasons such as motivating employees, preserving the founder’s legacy, transitioning out over a period of time, and much more. Nuances exist that may influence the valuation under ESOP guidelines. For example, an ESOP incurs additional costs related to annual valuations and other fiduciary obligations to protect employee interests and takes out a loan to support the purchase of shares, so proper forecasting that accounts for all of these effects on cash flow is critical.
Paying Fair Taxes
In many cases, the value of a closely held business becomes an individual’s primary asset that should be protected from undue exposure to taxation. Historic and current tax court cases have shown that the Internal Revenue Service (IRS) allows for significant discounts in value to be taken when reporting assets on an individual’s estate or gift tax return. The potential tax savings from this process could be hundreds of thousands, or even millions, of dollars.
Developing a Buy-Sell Agreement
A buy-sell agreement establishes the methodology used by the partners or shareholders for the disposition of a departing or deceased party. A formal business valuation would assist the partnership or corporation by addressing items like the events that trigger a buyout, the funding for a buyout, and the methodology for valuing the business interest.
Knowing the true value of your business can give you a significant advantage when it comes to selling, passing on, or strategically planning for your agency. Performing an annual formal collection agency valuation could potentially save millions of dollars in real costs in the long run.
Valuing your business is a complex process, requiring significant expertise and extensive industry knowledge. Fortunately, Topline Valuation Group, Kaulkin Ginsberg’s sister company, is here to help. Topline’s nationally certified experts offer accounts receivable management owners and executives with an in-depth assessment of their company’s strategic opportunities and enterprise value with our product, the Strategic Valuation Assessment (SVA). An SVA provides an understanding of value, relative to transaction structures and current market conditions, and is a more strategic tool used to aid in business discussions and planning.
For more information, or to schedule a confidential discussion of your business goals, contact us at firstname.lastname@example.org.