When you’re ready to buy or sell a business, you’ll want to ensure that every aspect has been double- and triple-checked. Hiring accountants and attorneys who are well-versed in business valuations can give you peace of mind that all forms of “value” are represented.

Panelists: Dennis Giangregorio, CPA, CVA, audit and assurance manager, Mason + Rich, masonrich.com Christopher Ratté, attorney, Shaheen & Gordon, P.A., shaheengordon.com

Dennis Giangregorio, CPA, CVA, audit and assurance manager, Mason + Rich

Q. Why would I need a business valuation?

As of the most recent census, data shows that the average age of a New Hampshire resident is 43.4 years, which makes New Hampshire the second oldest state in the nation. Further, a full 29% of New Hampshire residents are between the ages of 50 and 69.

This is a hard-working group made up of innovators, entrepreneurs and business owners who are in their peak earning years. Some business owners may be looking to expand and others may be exploring exit strategies — in either case, business valuation services will prove to be an essential decision-making tool.

Q. How does the valuation fit into my expansion or exit strategy?

For those business owners who are expanding their businesses through merger or acquisition activity, a business valuation can certainly provide a fair market value for the target business. However, there are additional services that a valuation analyst can provide which will be invaluable for business owners. Due diligence procedures will ensure that the entity’s financial reporting provides a complete picture of its operating results. A quality of earnings report can be produced that will provide the stakeholders in a business transaction with a detailed analysis of revenues and expenses and expert findings and recommendations that may arise. In some cases, buyers use financing through banks or the Small Business Administration, and a valuation report could be required by the lender.

Certain business owners may be looking at options for selling their business or transitioning ownership to current business partners or family members. These business owners should discuss their goals with the valuation analyst to determine how the valuation report will be used. Based on their decision, the analyst will provide a report to be used in a sale transaction, or for use with gift and estate tax reporting requirements.

Q. What should I expect in my valuation engagement?

Business valuation reports come in many different forms depending on how the value is going to be used. Business owners should expect to have a detailed conversation with the analyst regarding the scope and use of the valuation report. Additionally, business owners will be asked to provide up to five years of historical financial reporting information, tax returns, budget versus actual reports and any projections that management has created. An analyst will generally spend time on-site and perform interviews with owners and several key employees. At the conclusion of the engagement, the business owner should walk away with, not just a fair value, but insight into operational risks and the drivers of enterprise value.

Christopher Ratté, attorney, Shaheen & Gordon, P.A.

Q. What legal factors can influence the valuation of a business?

Business valuation isn’t just about profit and loss numbers; legal factors can play a critical role in the valuation of a business. For instance, intellectual property (IP) rights can significantly enhance a company’s value. A business with patented products or copyrighted materials may command a higher valuation than one without such assets.

Certain contractual rights can also increase the value of a business. An exclusive contract, such as a franchise territory or exclusive distributorship, could be the most valuable asset of a small business. Similarly, recurring customer contracts and subscriptions ensure ongoing revenue streams that are more valuable to a potential buyer or investor than one-off sales.

Conversely, some legal issues can decrease value.

Pending litigation or the threat of legal disputes will negatively affect valuation. Buyers or investors do not want to take on the risk of unresolved lawsuits, which may lead to reduced offers or walking away altogether. Similarly, regulatory compliance issues can diminish a business’s worth, particularly in heavily regulated industries like health care and finance. Environmental issues, employment matters, and other legal issues can also affect valuation. A potential buyer or investor must perform careful due diligence to avoid these negative legal issues.

Q. How do disputes among business partners affect the valuation of a company?

Disputes among business partners can significantly impact a company’s valuation, often in negative ways. Such conflicts create uncertainty about the business’s future, which is a major red flag for potential buyers or investors.

Legal disputes among partners, such as lawsuits over ownership or breach of fiduciary duties, are particularly damaging. These conflicts can deplete the business’s financial resources due to legal fees and create reputational harm. Furthermore, they may delay critical decisions, like approving budgets or signing contracts, which can stunt growth and lower valuation.

Ownership disputes are a common issue. In cases where the dispute leads to the potential exit of a partner, the valuation process becomes even more complicated. Buyout provisions, if they exist, will often dictate how the departing partner’s share is valued, but contentious negotiations or litigation over these terms can stall the process.

To mitigate these impacts, businesses should have well-drafted partnership or shareholder agreements that outline dispute resolution mechanisms, buyout procedures and ownership rights. Proactively addressing disputes with the help of legal counsel can prevent longterm damage to the company’s value and reputation.

Q. When should a company consider a professional business valuation?

Most business owners have a rough idea of what their company is worth, but there are several important reasons for engaging a professional to conduct an accurate assessment of a company’s value, rather than relying on speculation. These reasons include: (i) preparing for succession planning whether the plan is to sell to a third party, a family member or key employee; (ii) establishing a valuation methodology to be utilized to buy out a partner in the event of death, disability or a voluntary retirement; (iii) to establish a purchase price for a partner buy-in; (iv) to assist with gift and estate tax planning; or (v) to prepare, in advance, for a company sale where a valuation might highlight opportunities to improve profitability.

Q. How can a law firm like Shaheen & Gordon assist with my business valuation?

The attorneys at Shaheen & Gordon have worked on hundreds of business transactions that require valuation services. An attorney can help you structure your transaction and identify what type of valuation professional will best serve your needs. We can help formulate the parameters and goals of a valuation, implement recommendations that might be made by a valuation professional, and assist with due diligence to identify potential risks and legal issues affecting valuation.