Determining Your Company’s Undocumented Value
Business appraisals are not one-dimensional. In fact, a good business appraisal is one that factors in a wide range of variables in order to achieve an accurate result. Indisputable records ranging from comparables and projections to EBITDA multiples, discount rates and a good deal more are all factored in.
While an appraiser may feel that he or she has all the information necessary, it is still possible they have overlooked key information. Business appraisers must understand the purpose of their appraisal before beginning the process. All too often appraisers are unaware of important additional factors and considerations that could enhance or even devalue a business’s worth.
There Can Be Unwritten Value
Value isn’t always “black and white.” Instead, many factors can determine value. Prospective buyers may be looking at such variables as profitability, depth of management and market share, but there may be more that determine value.
Some other factors to consider when determining value: How much market competition is there? Does the business have potential beyond its current niche? Are there a variety of vendors? Does the company have easy access to its target audience? What is the company’s competitive advantage? Is pricing in line with the demographic served? These are just some of the key questions that you’ll want to consider when evaluating a company.
There are Ways to Increase Both Valuation and Success
Successful businesses didn’t get that way by accident. A successful business is one that is customer focused and has company-wide values. Brian Tracy’s excellent book The 100 Absolutely Unbreakable Laws of Business notes that it is critical for businesses to have a company-wide focus on three key pillars: marketing, sales and revenue generation. Tracy also points out that trends can be seen as the single most vital factor and bottom-line contributor to any company’s success and, ultimately, valuation. For 2018 and beyond, projected trends include an increase in video marketing, the use of crowdfunding as a means of product validation, the increasing use of diverse payment options, increasing use of Artificial Intelligence, the influence of the gig economy, and more.
No Replacement for Understanding Trends
If a company doesn’t understand trends, then it can’t understand both the market as it stands and as it may be tomorrow. Savvy business owners understand today’s trends and strive to capitalize on the mistakes of their competitors while simultaneously learning from their competitors’ successes.
Tracy accurately states that while there are many variables in determining value, finding and retaining the best people is absolutely essential. One of the greatest assets that any company has is, in the end, its people.
Professional business brokers understand the nuances of business valuation and can help a business owner find value where they might not realize it existed.
Copyright: Business Brokerage Press, Inc.
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Considering All of Your Business Real Estate Options
Most business owners don’t know what real estate options are available to them when it comes time to sell the company.
Understanding the value of the real estate and the tax liabilities associated with it is important, according to a December 2018 article in Divestopedia describing options for business real estate when selling a company. Understanding one’s business real estate options will ultimately help in achieving “the goals desired in a transaction.”
There are two main options:
- Sell everything including the real estate.
- Hold onto the real estate for the rental income.
If you, as the business owner, personally own the real estate in a separate entity, then you are good to go, according to Divestopedia. You should have a “clear path to valuation.”
However, if your company owns the real estate, then things get a little more complicated. In this situation, you should have a third-party appraisal of the real estate so that its value is clear. If your business is a C-Corp and your business also owns the real estate, then it’s a good idea to talk to your accountant as there will be differences in taxation.
Every situation is different. Many buyers will prefer to acquire the real estate along with the business. On the other hand, many buyers may prefer a lease, as they don’t want everything that comes along with owning real estate. Communicating with the buyer regarding his or her preference is a savvy move.
If you do plan to retain the building, then you’ll want to be certain that a strong lease is in place. Ask any business broker about the importance of having a strong lease, and you’ll get some pretty clear-cut feedback. Namely, you always want to have a strong lease.
Issues such as who repairs what and why should all be spelled out in the lease. It should leave nothing to chance. One of the best points made by the Divestopedia article is that you will want a strong lease for another key reason. When the time comes to sell the property, you want to show you have a lease that is generating good income.
Real estate and the sale of your business are not one-dimensional topics. There are many variables that go into selling when real estate is involved. It is important to consider all of the variables and work with a business broker who can help guide you through this potentially complex topic.
Copyright: Business Brokerage Press, Inc.
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Read MoreValuation Theory PowerPoint by Dan Browning
Dan Browning, a GABB Affiliate, has 20 years of experience as a business appraisal professional and holds the Master Analyst in Financial Forensics (MAFF) and Accredited in Business Appraisal Review (ABAR) designations from the National Association of Certified Valuators and Analysts (NACVA).
He spoke to the Georgia Association of Business Brokers on Oct. 30 about the complex issue of valuation theory, or how to set a fair market value for a business.
PROFESSIONAL DESIGNATIONS AND MEMBERSHIPS
- Master Analyst in Financial Forensics (MAFF) from the National Association of Certified Valuators and Analysts, originally awarded August 1999
- Accredited in Business Appraisal Review (ABAR) from the National Association of Certified Valuators and Analysts, originally awarded March 2010
- Georgia Association of Business Brokers (Affiliate Member)
- State Bar of Georgia (Active Member; Eminent Domain and Nonprofit Law Section Memberships)
- Editorial Board, Business Appraisal Practice (IBA Journal) 2013-2015
EXPERT WITNESS TESTIMONY
- Mr. Browning has been admitted as an expert witness for testimony at trials in the Superior Courts of DeKalb, Gwinnett, Fulton, Henry, and Clayton Counties, with deposition testimony in numerous other jurisdictions.
PRESENTATIONS AND SEMINARS
- Institute of Business Appraisers (IBA) and National Association of Certified Valuators and Analysts (NACVA) Ethics and Standards Webinar, October 2009
- IBA/NACVA National Conference, Ethics and Standards, May 2009
- IBA Southeastern Regional Conferences, 2001, 2002, 2003, and 2008
- Georgia Association of Business Brokers Education Conference, 2005
- IBA National Conference, 2000 (full-day demonstration trial participant)
EDUCATION
- University of Notre Dame, Master of Arts (Government), January 1995
- Emory University School of Law, Juris Doctor, May 1992
- Emory University, Bachelor of Arts, May 1985; Phi Beta Kappa
ADDITIONAL SKILLS AND EXPERTISE
Mr. Browning possesses a background in non-litigation forms of dispute resolution, with coursework in alternative dispute resolution theory and practice from the Emory University School of Law and experience as a Hewlett Foundation Scholar at The Carter Presidential Center’s Conflict Resolution Program. He has also consulted with several nonprofits (particularly arts and religious/social service groups) on business practices, organization, and management.
A Business Opportunity Is NOT a Going Business for Sale
By Peter Siegal, Founder & Senior Advisor at BizBen.com
What’s the difference between a business opportunity and a going business for sale? They are NOT the same thing.
A business opportunity refers to all opportunities for those in the market to buy and own their own small business. But it’s not the same thing as a going business for sale.
These are five characteristics that distinguish a business opportunity an existing retail, service, restaurant or other kind of business that is for sale.
1. Customer, Employees, Location: An ongoing business will come with existing customers, employees, a known name and usually a distinct location. A business opportunity is an idea for providing products or services, and some of the methods and resources needed to implement the idea. Some business opportunities are meant to be operated from the buyer’s home or other facility obtained by the buyer.
Examples of business opportunities are service businesses such as placing and servicing vending machines, billing and related services for professionals, assembling finished products from parts provided, and selling products in a direct marketing system.
2. Established Track Record: An ongoing business has an operational history –producing revenues and earnings for the owner, and establishing and building relationships with customers and suppliers. A business opportunity will be a new business so it has no track record. If the buyer wants to know if the sales, earnings and other projections made by the seller are likely to be realized once the business is started, they should understand this difference.
3. Risk. Many buyers believe a business opportunity is a riskier investment because there is no proof will be successful in the territory or region where it is being offered. By contrast, a going business has a known operating track record.
4. Cost: A business opportunity can usually be obtained for less money than buying an existing business. But a business opportunity may require additional cash to operate. You might have to purchase inventory, equipment, fixtures or other assets to operate the business. You might also have to pay for “soft” assets, such as training and trade name. By contrast, the business serving customers for awhile will usually cost more a buyer would be required to purchase goodwill–also called “going business value,” and often a covenant not to compete.
5. FTC Regulations: The Federal Government has little reason to get involved in the way an existing business is offered and sold, unless the business that requires Federal licensing. The Federal Trade Commission has established rules for the way a business opportunity can be sold. FTC requires sellers to provide interested buyers with a disclosure statement seven days before that buyer can sign a contract or hand any money over to the seller of the opportunity. Included in the disclosure are names and contact information for other investors who have purchased the opportunity being offered. The government got involved after buyers complained about business opportunities sold with false or misleading information.
So, a buyer of a business opportunity must complete the due diligence process takes place before there is any agreement for purchase. When you buy an ongoing business, you complete that process after buyer and seller have agreed on price and terms. That contract includes the provision allowing the buyer the right to analyze and learn more about the business–to make sure the company operates and performs as represented. Due diligence must be completed before the contingency is removed and the transaction can close.
When considering the purchase of a business opportunity, a buyer should call on other buyers of that opportunity and learn their experience. And conduct other common sense methods of investigation before signing on the dotted line.
About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com, where this post originally appeared. he works with business buyers, owners/sellers, intermediaries, agents, investors, and advisors).
All About Qualified Opportunity Funds – New Tax Tool Available To Defer and Possibly Eliminate Gains
Andrew Moore CPA
Effective January 1, 2018 the Tax Cuts and Jobs Act established Federal Qualified Opportunity Zones (QOZs) with the goal of allowing large amounts of capital to flow into economically distressed area across the country. To promote capital investment in these Qualified Opportunity Zones, legislators included three favorable tax provisions that benefit qualifying taxpayers. First, the ability to defer paying tax on capital gains until December 31, 2026. Second, basis increases which reduce deferred gains and lower the eventual capital gain tax to be paid by December 31, 2026 on deferred gains. Third, zero tax on new capital gains derived from capital appreciation in Qualified Opportunity Fund (QOF) investments held for at least 10 years.
Wait, what are Qualified Opportunity Zones?
The new tax law authorized the creation of Qualified Opportunity Zones (QOZ) which are defined as census tracts in low income communities and specifically designated as QOZs. The QOZs, now finalized by Treasury, were identified and nominated by the governor of each state or territory in which the zone is located. Governors were directed to select zones that were the focus of economic development and areas which had recently experienced significant layoffs due to business closures and relocations.
The Treasury Department has already reviewed and approved the list of opportunity zones. To view Federal Qualified Opportunity Zones visit this link, and follow the direction for using the map.
How Qualified Opportunity Funds (QOFs) Correspond to Qualified Opportunity Zones (QOZs)
A Qualified Opportunity Fund (QOF) is an investment vehicle created for investing in eligible property located in a Qualified Opportunity Zone. Investments in these funds provide for the three tax benefits listed in the first paragraph of this article. To qualify as a Qualified Opportunity Fund, 90% of the assets held by the Fund must be Qualified Opportunity Zone Property (QOZ Property). QOZ Property is property that was acquired after December 31, 2017 located in a Qualified Opportunity Zone, and is described in more detail below.
One of the largest opportunities that our firm sees with these types of investments pertain to investments in existing real estate needing significant improvements, new real estate development projects located in Qualified Opportunity Zones, and investments in businesses requiring significant amounts of tangible assets to operate. However, the details of all the types of property that qualify are summarized here as well. QOZ Property is defined as Qualified Opportunity Zone Stock (QOZ Stock), Qualified Opportunity Zone Partnership Interest (QOZ Partnership Interest), or Qualified Opportunity Zone Business Property (QOZ Business Property).
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- Qualified Opportunity Zone Stock: The QOF can buy stock of almost any business except for “sin” business such as tanning salons, liquor stores, adult entertainment, casinos, racetracks, etc. The stock must be acquired after 12.31.17 at its original issue in exchange for cash; at the time the corporation was formed the business was a QOZ Business (defined below) or for a new corporation, it was formed to be a QOZ Business; and during substantially all of the QOF’s holding period of the stock, the corporation was a QOZ Business.
- Qualified Opportunity Zone Partnership Interest: A QOF can invest in a partnership capital or profits interest which meets the following requirements: 1) the interest is acquired by the Qualified Opportunity Fund after December 31, 2017, from the partnership, solely in exchange for cash; at the time the interest was acquired, the partnership, was a QOZ Business (defined below) or for a new partnership, it was formed for purposes of being a QOZ Business; and during substantially all the QOFs holding period of the interest, the partnership was a QOZ Business.
- Qualified Opportunity Zone Business Property: this property is tangible property used in a trade or business of the Qualified Opportunity Fund (QOF) and meets all of the following requirements: the property was acquired by the QOF by purchase from an unrelated party in accordance with Section 179(d)(2); the original use of the property located in the Qualified Opportunity Zone begins with the QOF or the QOF substantially improves the property; and the business is not a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises (“sin” businesses). Substantial improvement of a property is defined as occurring if the original basis of the property at its date of acquisition is at least doubled over a 30 month period beginning on the date of acquisition. For example, if a QOF purchased existing real estate located in a Qualified Opportunity Zone, it must substantially improve (defined as doubling the cost basis of the property over 30 months) for the property be qualified.
As mentioned in “1” and “2” above, QOZ Stock and QOZ Partnership Interests must relate to Qualified Opportunity Fund Businesses (QOZ Business). A QOZ Business is a trade or business that meets the following requirements
- At least 50% of the total gross income of the QOZ Business is derived from an active trade or business;
- A substantial portion of any intangible property is used in an active trade or business;
- Less than 5% of the average of the aggregate unadjusted bases of the property of the entity is attributable to nonqualified financial property (debt, stock, partnership interests, options, forward or futures contracts, notional principal contracts, annuities, etc.), and the business is not a “sin” business (mentioned above).
Tax Reporting as a Qualified Opportunity Fund
A taxpayer can designate its entity as a Qualified Opportunity Fund (QOF) via a one page self-certification Form still in process of being drafted by the IRS and attaching this to their tax return. A Qualified Opportunity Fund will file the typical Corporate or Partnership business tax returns, but must meet certain testing hurdles several times throughout the year to insure compliance with the 90% of assets held in Qualified Opportunity Zone Property is met. Failure to maintain a 90% investment in Qualified Opportunity Zone assets will result in a tax penalty to the fund equal to the shortfall under 90% times the existing IRS Underpayment Rate.
Now, why should you care about all of this – what’s in it for taxpayers?
There are three tax benefits available depending on how long an investor holds the QOF interest. In considering the below, remember that investors do not need to live or work in the Qualified Opportunity Zone to gain tax benefits from the investment.
- Tax Deferral until December 31, 2026
An investor who has or is about to realize capital gains from an investment (stocks, real estate, sale of a business, etc.) can elect to invest the amount of that gain into a QOF and the capital gain will be deferred until the earlier of two dates: when the interest in the QOF is sold or Dec. 31, 2026. The taxpayer has 180 days from the date of sale to roll the gain into a QOF and a “qualified intermediary” is not required to hold the capital during that time. In addition, unlike “like-kind exchange”, only gain need be invested in a QOF – not the original principal. - Tax Reduction on Deferred Amounts (basis increases)
A taxpayer’s initial investment in a QOF will have zero basis since gain is being deferred into the fund. If a taxpayer holds the QOF investment at least 5 years before December 31, 2026 the investor receives a 10% step up in basis on the amount deferred. If held for 7 years before December 31, 2026 an additional 5% step up in basis is received. For example, if you had 2018 gains of $100,000 that you invested in a QOF and held the investment for 5 years before disposition the gain you would pay tax on when sold would only be $90,000 as you would receive a $10,000 basis step up (10%) for holding the asset at least 5 years. If you held it another two years, for a total of 7 years before disposition, you would only pay tax on $85,000 of the original deferred gain. Please note, to receive the full 15% step up for holding property for 7 years the QOF investment must be made by December 31, 2019 as gains can only be deferred until December 31, 2026 no matter which year your investment was made. - Zero Tax on New Capital Gains
If the investor holds its’ interest in the QOF for 10 years there is no resulting tax on new gains derived inside of the QOF because the taxpayer receives a basis step up equal to the fair market value when sold. For example, suppose you had a $1,000,000 long term capital gain on the sale of Amazon stock in 2018 and elected to defer that gain until December 31, 2026 by investing all $1 Million into the XYZ Qualified Opportunity Fund in 2018. Further, suppose your original $1 million investment into the XYZ Qualified Opportunity Fund grew to $3.5 Million by December 31, 2028 at which time you disposed of your investment in the XYZ Qualified Opportunity Fund for $3.5 Million. Your additional $2.5 Million of gain ($3.5 Million – $1 Million) derived from the increase in value in the XYZ Qualified Opportunity Fund is tax free due to a 100% basis step up in that amount. Please note, on December 31, 2026 the original deferred gain would have been triggered resulting in your paying tax on $850,000 of your original $1 Million of deferred gain (15% basis step up for holding in the QOF 7 years).
How Can Frazier & Deeter Help?
Involve Frazier & Deeter early in either your decision to create a Qualified Opportunity Fund or in your decision to defer gains by investing in a Qualified Opportunity Fund. The IRS is still in the process of issuing Regulations regarding this new area of tax law. We have contacts throughout the industry, including contacts with different Opportunity Funds, and attorneys who can help create and structure these funds. As CPAs, we are simply facilitators and advisors and are not influenced by any sort of commission. If you have questions regarding Qualified Opportunity Fund creation or investment or both or need help with any other tax planning strategies or tools feel free to give me a call at 404.573.4336 or email me at Andrew.Moore@FrazierDeeter.com.
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