Over the last decade, the demand for business valuation services continues to flourish. According to 2002 and 2003 surveys conducted by Accounting Today, of the top 100 CPA firms, business valuation was the fastest growing niche service. In 2006, that ranking dropped to second, primarily due to the earlier meltdown of the public accounting industry. Attest services, forensics/fraud, litigation support and Sarbanes-Oxley compliance all tied for first along with international tax services. In 2008, business valuation was again in second place, with estate, trust and gift tax planning dropping litigation support to tie at second with business valuation. The National Association of Certified Valuation Analysts (NACVA) has grown from its two original co-founders in 1991 to an average membership of 5,500 in 2003, to a swell of 7,000 plus as of this publication date. As these surveys indicate, business valuation remains increasingly strong in recognition and importance.
Some of the growing attention to business valuation can be attributed to the Sarbanes-Oxley Act, the 2002 law that governs public companies’ financial reporting, and restricts the nonaudit work accounting firms can perform for public company audit clients.
Demographics are playing a significant part in business valuation demand. Since 2008, business valuation services continue to be at the forefront of demand due to the growth of the estate, trust and gift tax planning services. Baby boomers coming of retirement age, who own their own successful business and require succession and estate planning, are fueling business valuation demand.
Another reason is the increasing sophistication and tax structuring of business purchases, where both the buyer and seller request an unbiased third-party opinion of value. Furthermore, buy-sell agreements, financial plans and estate plans cannot be written and applied successfully without a business valuation assessment to know the owner’s total business worth.
The downturn in the economy over the past few years has also spurred demand for business valuation. Overall stock values of privately held businesses have declined, which has provided greater opportunities with gift and estate tax planning. Owners are taking advantage of lower values, which allow for larger blocks of ownership to be transferred. The stalled economy has also spurred valuation services for economic damages or lost profits analysis as well as for purposes of impairment of assets under FASB 144 Accounting for the Impairment or Disposal of Long-Lived Assets. Both private and public companies must comply with financial reporting standards and, in doing so, must analyze their assets for impairments that reduce their underlying asset values.
A business valuation expert will, at a minimum, belong to one of the four professional valuation organizations, and as a member he or she is required to abide by professional valuation standards and practices. Gaining accreditation from one of the organizations takes the valuator’s commitment to the valuation profession that much further and business owners would be wise to seek out only accredited, experienced professionals. The American Society of Appraisers (ASA), National Association of Certified Valuation Analysts (NACVA), American Institute of Certified Public Accountants (AICPA), Institute of Business Appraisers (IBA) and the Canadian Institute of Chartered Business Valuators (CICBV) all offer accreditation programs although each has their own particular report writing standards.
The valuation engagement defines the role of a valuation professional. For example, litigious matters, such as divorce, wrongful death/injury, dissenting owners and taxation, require a third-party, unbiased opinion of value. This is considered engaging an expert and differs greatly from matters of advocacy.
Professionals who serve as advocates for their clients are termed consultants. Consultants provide advice for matters involving merger, acquisition or purchase/sale of a business enterprise or interest. There is a clear distinction between the two roles and professionals who sense the engagement is somewhere in the gray middle should either set clear, defined expectation boundaries or decline the project entirely.
Nonetheless, engaging an experienced, accredited valuator provides a level of inoculation, especially with estate tax matters and related ownership transfers. The vast majority of IRS challenges focus on disputing a taxpayer’s valuation of the business assets. Aside from issues involving the legality of the estate plan itself, the IRS would only have concerns regarding the amount of tax owed on the transferred asset. If such a dispute arises and progresses to litigation, the result is determined after a “battle of the experts.”
The taxpayer should not rely on an accountant or on someone else who is not qualified as an appraiser to value a business interest. The taxpayer, most often, has the burden of presenting credible evidence in order to prove the value reported. An opinion of value presented from a qualified, credentialed appraiser many times wards off an IRS dispute or unrealistic valuation claim.
When faced with a taxpayer valuation based on the opinion of an experienced, independent appraiser, the IRS must hire an equally qualified representative to denounce the opinion of the taxpayer’s professional. The IRS’ hired representative must also be able to produce an opinion of value different enough to generate a tax revenue advantage and justify IRS expenditures as a result of the dispute. This cost/benefit analysis can and should work to the advantage of the taxpayers who use timely, well reasoned valuations.
Hiring an accredited, experienced valuation professional is also a preventative against gift and estate tax challenges. There is a three-year statute of limitations on gift transfers; this applies in the estate tax context as well. Upon the death of a donor, the IRS can go back only three years in examining prior gifts; however, the gift must be adequately valued and disclosed (as defined by the IRS, Reg. §301.6501(c)-1(f)(2)). The statute of limitations does not apply for gifts that are not adequately valued and disclosed, including and especially at the time of a donor’s death. Therefore, the experienced business valuation professional creates a safe harbor for those gifts made more than three years ago.
A business valuation provides business owners the benefit of planning an exit strategy and mapping a course of action for both premeditated and untimely life events. In short, valuation is more than just a calculation of numbers. It is a valuable financial planning tool that captures a company’s or owner’s worth beyond the balance sheet, and in many cases, considers not only the company’s tangible worth, but intangible value and future expectation.