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PLE Shareholder Ed Salek offers the following tips for establishing the value of a business and the value of an owner’s interest in a business. According to Edward J. Salek, CPA, CVA, a carefully prepared business valuation is often used to establish value for business sales, estate and gift taxation, dispute resolution, and purchase price allocation. It is also used to establish a formula for estimating the value of shareholders’ or partners´ ownership interests for buy-sell agreements, among other purposes.
"A well-done business valuation may help a business owner improve the company’s performance and its future ability to generate earnings and cash flow for its shareholders," said Salek. "Most importantly, a business valuation is helpful in several key areas including identification of risk factors, budget planning, cash flow and debt management, and business operations and planning," he said.
Salek offers the following steps for setting up a business valuation plan for business owners:
Business Operations and Planning - When creating a business plan, the business owner should be careful to examine policies and procedures, budgeting, forecasting, and goal setting. A valuation comes in handy for enhancing a plan, by making financial comparisons of the business to industry norms. The valuation also appraises monetary strengths and weaknesses, and cites deviations from this norm. Overall, it gives the business owner a valuable insight into how their company should be structured to beat the competition and increase value.
Budget Planning, Cash Flow and Debt Management – As business owners take great efforts to decide about new purchases including facilities and equipment, a business valuation can help. A financial analysis of industry trends and the company’s strengths and weaknesses can save time and provide an outside perspective of the company’s financial status. A strong valuation report contains historical trends in expenditures, and an evaluation of the impact of those expenses on a business. This information can help an owner anticipate changes in debt and forecast cash flow, which is invaluable to a company’s financial stability and strength.
Identification of Risk Factors – Business owners must identify all risk factors that can negatively or positively affect their business. A business valuation can explain each risk factor, including industry, economic, financial, and technological risk and can help to refocus and rededicate efforts with key issues that may be impacting the business. A valuation can explain each risk factor including industry, economic, financial, and technological risk and help an owner refocus and rededicate efforts towards the key issues.
Knowing these factors and accurately responding to them can have a positive impact the company’s value.
"Properly utilized, a business valuation can provide business owners with financial returns above and beyond the cost of the report. In fact, it can set a business apart from its competitors, and help set its course for the future," said Salek.
For more information or to set up a business valuation, contact Presser, Lahnen & Edelman at 904.296.9333.
PL&E shareholder Eve Brown offers the following financial and accounting tips for the entrepreneur. According to Brown, the lure of being "your own boss" can be intriguing; but getting a new business off the ground is potentially the most challenging career move a person could make.
Keeping that business going strong and helping it grow requires dedication, a lot of time and the implementation of sound financial strategies, said Brown. Too often, business owners get so caught up in the venture itself, that they overlook the finance and management issues, which can fatally affect a new business, she said. According to Brown, the following are five tips to help the entrepreneur achieve a profitable year:
Tip #1: Develop a business plan and budget.
Your business plan lays the groundwork for your company. Without it, your business may face financial struggles that are easily avoidable with this time investment. A business plan includes your policies and procedures, specific plans for the near future, general plans for the distant future and a budget based upon the plans you laid out. Developing and using a budget will help you manage cash flow accurately and prepare for business growth or expansion. Having a budget will also help you deal with employee bonuses, profit sharing expenses, paying tax bills, purchase of raw materials and can help in establishing a line of credit with your bank. Your business plan and budget should be based on a 12-month period and updated annually. Planning offers other advantages as well, such as increased deferment of taxes and the opportunity to funnel more money to shareholders and employees.
Tip #2: Understand your company´s financial information.
If you, like many other business owners, put off bookkeeping in favor of more pressing matters like marketing, serving customers and product development, making wise financial decisions can be difficult, if not impossible. Finding the time to read and understand financial statements to effectively evaluate your financial information and spot opportunities can also be hard on a small business owner. Find a professional who you are comfortable with and utilize their knowledge to make your business run smoothly. Understanding your financial information is key to being able to answer the question of "Where is the cash?" Involving your CPA as a partner in your business will enable its success as they help you analyze your situation and establish an accounting system that works for your business. Hiring a professional to handle these aspects of your business will save you money in the long run and ensure that your business is financially secure.
Tip #3: Develop internal controls for your accounting information.
Many small business owners entrust their entire bookkeeping operation to one employee. While it is important to have a bookkeeper, making that person solely responsible for all of your financial transactions makes it less likely that you will catch mistakes in financial statements or even embezzlement resulting in significant financial loss. Protect your interests by staying involved: thumb through checks as they come in, sign all checks, review monthly bank statements and occasionally fill in for your bookkeeper. While the segregation of duties can sometimes seem nearly impossible in a small business, it is necessary for you to find a balance to keep things in check. This can be as simple as having your bank statements sent directly to your CPA before passing them along to your bookkeeper. While your CPA may not scrutinize the statements, a quick review can uncover unusual entries or trends. You should also obtain the necessary reports at month-end that tie all financial activity together for that time period. These reports will let you see where you stand month to month and can also reveal any mistakes or financial misconduct.
Tip #4: Learn to delegate.
Trying to do everything yourself can be a fatal error for any business. The timeliness and quality of your products may suffer and it will be harder and harder to maintain a competitive edge in your market. It also causes undue stress and anxiety. Consider delegating some aspects of the business such as scheduling, production, daily bookkeeping and other tasks to staffers and outside vendors or consultants. This will free you to concentrate on the big picture and give you the time to make your business grow.
Tip #5: Be active in the management of your business.
Delegating is one thing, but giving away the house is another. If you allow subordinates who don´t have a real economic interest in the company to take charge, you may be putting your business at risk. The key to success is to find a good balance between delegating duties and staying involved to some degree in all major areas of your business. Communicate with your staff and ask for regular updates. Establish methods for assessing the quality of the work that is being done for you. It is your job to provide the vision for your company´s future, but you don´t have to know all the answers. Smart business owners rely on outside professionals such as attorneys and accountants to help make their businesses profitable and successful.
For more information, contact Eve Brown, CPA at 904.296.9333.
