There are many reasons to have your business valued
Once thought of as only a service that a bank might obtain as part of its due diligence procedures when evaluating a business loan, many companies are now discovering that obtaining a business valuation is a necessary part of operating a business.
This shift has been primarily brought on by accounting guidance issued by the Financial Accounting Standards Board, the Securities Exchange Commission and other oversight agencies; greater sophistication in the business-valuation industry; and a rise in new tax, estate-planning, and accounting strategies.
For example, tale "plain vanilla" stock options. A few years ago, it was acceptable for private companies to issue stock options and account for them using the intrinsic value method (i.e. recognizing an expense equal to the difference between the stock price on the date of grant and the exercise price over the vesting term, if the exercise price was less than the stock price).
For private companies, the expense recognized was most often zero, due to the stock price being equal to the exercise price on the date of grant. However, under the FASB's Statement of Financial Accounting Standards No. 123(R), Share Based Payment, this method is no longer acceptable and stock options must be fair valued, which most often also requires a valuation of the company itself in order to determine the fair value of the underlying shares.
This is but one example of the FASB's shift toward fair-value accounting.
More recently the FASB has issued SFAS No. 157, Fair Value Measurements, and SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. These establish a fair-value hierarchy and provide the option for recording financial instruments at fair value on the face of the financial statements.
Of course, there are other uses of business valuations other than those prescribed by generally accepted accounting principles. For example, a Hawaii sole proprietor may find it useful to obtain a business valuation when he or she is ready to retire and there are no family members to whom to pass on the business. A partnership might seek a business valuation when one partner wishes to buy out another. A valuation might also be sought to value an estate for transfer tax purposes.
Fortunately for those seeking valuation services, the number of valuation specialists or appraisers on the islands is growing. However, when selecting a valuation specialist, a company should consider the following:
» Licensing: In order to obtain a license in valuation, a candidate must pass a proficiency examination, have several years of experience, meet continuing education requirements, and adhere to professional standards.
» Area of expertise: Just as you would not take a refrigerator to an auto mechanic, you do not want to engage a real estate appraiser to value a noodle shop. Inquire as to the types of valuations performed by the specialist to ensure that they have specialization to meet your needs.
» Reputation: Ask for a list of referrals and call a few to ensure that the specialist will perform according to expectations.
» Scope: Make sure that the scope of the engagement is clearly defined, as well as the deliverables, to negate any last minute surprises or fee disputes.
» Finally, if the valuation is to support an accounting transaction that will be audited, consider having the company's independent auditors involved during the valuation process to avoid any delays in the issuance of audited financial statements.
Dustin Verity is an assurance manager for the Honolulu office of Grant Thornton LLP. He can be reached at firstname.lastname@example.org