How do I find out the value of my business today?
17 years in the construction business, with sales varying from $3,000.000 to $900,000 annually. Going through a divorce and need to know the value to include in an agreement.
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Jul 18, 2014
Grace,
You have lot's of great advice. I will take another approach. Rarely do construction firms have much value beyond hard assets.
However, if you chose to continue in the construction business once divorce procedures are completed, I would like to encourage you, right from the start, to build assets that are asset protected that are not related to your construction business. You require safety and a long-term view, especially after a divorce.
Jun 16, 2014
Is your business owned by you or is it in an LLC or S corp? And does the credit belong to the business or to you? In otherwords, is the business backed by you only? Or, is the business backed by itself with its own credit and assets? It will make a difference in value and in sale. I'd like to know what has happened since your post and get feedback from you on how you were able, if at all to get your business analysed and if the value came as a surprise or a disappointment and why.
Apr 26, 2014
Do not do this yourself ... work with a CDFA.
If you live in the boston area contact Chris at insightfinancialstrategists.com.
If you don't, he may offer to work with you remotely or perhaps know someone who is close to your area.
Apr 22, 2014
After reading all the answers below.
I think you should take a different approach .
Befor starting to examine the value of the Company.
First you should examine what you want.
Meening- if you can split the company and give
Your ex- wife 50% of the net profit ( preferd shers).
Ber in minde usually to pay now few millions can effect your
Cash flow and there fore it can leed you to a bad place. ( I don't know the whole financial data To point out my opinion wether it worth to pay the whole at once or to split the Company)).
For your question. I think that the people who wrote
Befor me done an excellent job.
Apr 22, 2014
It just assumptions so that can value your business.
I think first need to know the nature of your construction business. Base on your sales range, I assume it is a contractor business (correct me if I am wrong), question is are you a specialist, civil work or architect work? Assume you don't have products or IP, what you have are projects. Your core value will be your customers (main contractors) + a team of subcontractors + your project management framework. Minimum fixed assets and net total assets are expected to be low (if you take out most of the profit by way of dividend yearly).
If the above is true, I suggest valuation by comparing the following methods:
1. Average of last 3 years net profits (but should not lesser than the net total assets
2. Discount future cash flow for NPV (but you need to know your Cost of Capital maybe some bank rate or construction return rate + inflation rate + forecast growth rate)
3. Use total net assets if your business include high value equipment + the future income generate from these equipment. (you need appraisal)
Apr 22, 2014
Let's start with something counter-intuitive: There is NOT just one value of a business. A share of equity in a business can have many values, all at the same time. The one that is correct depends on a multitude of actors. The following are the main ones:
1. The purpose of the valuation. The purpose determines the 'standard of value'. Standard of value answers the question: "Value to whom and for what purpose?' Divorce laws vary by state. Your attorney should be able to tell you what the standard is in your state. The standard tends to evolve from the common (case) law--previous divorces.
2. The characteristics of the equity stake being valued. Is it minority, majority, control, 50-50, or what? Is it 'marketable' or 'non-marketable'. (BTW, among knowledgeable business appraisers, all 100% ownership stakes are considered 'marketable,' no matter what you may hear to the contrary.)
3. The state in which the business is located. More than 30 states have so-called 'super-majority rules'. In these states, engaging in a 'major corporate action'--how that's defined will vary by state, but often includes sale of the business, liquidation of it, recapitalization of it, acquisition of another business, etc.--requires a 2/3 majority, not a simple majority. Therefore, for example, the value of, say, a 35% stake in Virginia (a super-majority state) is worth more than the same 35% in exactly the same business in Texas (which is not a super-majority state). That is because, in Virginia, that 35% has 'blocking power' (because that 2/3 super-majority is required for major corporate actions) that it doesn't have in a simple-majority state such as Texas.
4. Provisions in Shareholder Agreements. If there is more than one owner of the business, valuation issues are often spelled out in Shareholder Agreements (a.k.a. 'Buy-Sell Agreements'). If there is more than one owner in your business and you DON'T have a buy-sell, you should probably rethink whether you want to continue working with the same lawyer. (THIS IS NOT LEGAL ADVICE!)
5. Provisions in Operating Agreements (for LLCs) or in Corporate By-Laws (for corporations). Sometimes there address valuation issues.
6. In the case of a minority stake in a business, the question of the distribution of ownership affects the value of a share or membership interest. That's easy to understand if you consider two scenarios: In #1, ten individuals each own 10% of the equity in a business; in #2, there is one 10% owner and one 90% owner. In which of these two businesses will the 10% stake be higher? #1, obviously. The 10% owner in #2 is, for all events and purposes, cannon fodder UNLESS there are provisions to the contrary in a buy-sell, operating agreement, or by-laws.
In the case of a construction business, there are other factors to consider: (1) Is it residential or commercial? (2) What's the local economy like? (If it's a 'company town', risk will be higher. Remember this iron-clad rule: When risk GOES UP, value GOES DOWN, and vice versa. We see it every day in the bond market: interest rates (the measure of risk) go up (down), bond prices (the measure of value) go down (up). It's as sure as the sun coming up in the morning.)
I could go on, but you get the picture. This might not be as simple as some, including those who have already commented here, would have you believe. And with respect to the comments of at least one of them, neither he nor anyone else can guarantee you that their valuation "would be accepted by the court." That's an unsupportable statement. Only judges can make those decisions.
I should also mention that, as of today, the CGMA (chartered global management accountant) "credential" requires no test and precious little experience (3 years of "qualifying experience"). I would give it no credence whatsoever until testing is required. That doesn't happen until January 2015. (Links: http://www.tscpa.com/Content/59040.aspx and http://www.cgma.org/BecomeACGMA/HowtoQualify/Pages/AICPA-Members.aspx). And, BTW, the "CFF" (Certified in Financial Forensics) was also a 'test-free' "credential" for the first three years it existed (2008/09/10). Point: More 'alphabet soup' may be less. Add'l point: Not all "credentials" are equal. The two hardest to come by are (a) the Accredited Senior Appraiser (in business valuation) - it requires 10,000 billable hours of experience (8,000 for CPAs with at least five years of experience), passing tests are each of four three-day classes, taking a 15-hour class on the 'Uniform Standards of Professional Appraisal Practice') and passing a test related thereto, and passing a review of a submitted comprehensive valuation report that uses BOTH a method under the Income Approach AND a method under the Market Approach. The other approach was referred to by one of the commenters, except he misnamed it: the 'CFA' designation stands for 'Chartered Financial Analyst'. This a rigorous three-year program that the Economist magazine referred to as "the gold standard" in financial analysis and valuation; over 3,000 pages of reading are required at each level, and only 19% of those who begin the CFA curriculum complete it.
At this writing, there are about 150 people in the U.S. and elsewhere who have BOTH the ASA and the CFA designation. Of those appx. 150, about 25 are also CPAs.
Finally, (a) DO NOT expect your attorney to be a valuation expert, (b) don't try to do this yourself, and (c) remember that you get what you pay for. Your business is probably your most valuable asset, just as your heart and your brain are the most essential organs in your body. Just as you wouldn't shop for the cheapest cardiologist or brain surgeon in town, don't get seduced by a low-balling valuation person.
I am a well-known full-time business valuation professional with over 20 years of full-time experience; I've taught valuation and related topics to CPAs and other financial professionals in 33 states, the District of Columbia, Puerto Rico, Canada, and Germany. Feel free to e-mail me: cfa2005 (at) gmail (dot) com if you want to discuss any of this on the phone. No charge for that.
I'm NOT asking to do the valuation of your construction business. I AM offering to help you make a good decision about whom you hire to do that. I can help you screen valuation professionals; I know most of the really fine ones. There are a series of questions that you need to ask so that you'll be comfortable and confident that you're in good hands when you do decide to retain someone. I would be glad to help you with those--no charge.
Apr 22, 2014
Your spouses attorney is probably demand a valuation. Many different factors determine the final value. Here is a great article to use as reference. http://www.constructioncpas.com/pdfs/ValuationPrimer.pdf
Apr 22, 2014
I agree with Mr. Gorman, you need to find someone with experience in business valuation, there are firm specifically dedicated to this. You will need a professional opinion if it is to hold up in divorce proceedings. I disagree with finding a CFA, most will have experience either in large corporate deal structuring or in mainstream investment valuation, neither of which will be of much use in your situation.
Apr 22, 2014
Value of a construction business could be computed by calculating the current fair market value of assets minus liabilities plus either the expected profit from current ongoing projects and known future contracts or the average profit from the last or 5 years (assuming there were no large variances due to unusual projects). The profitability factor can be anywhere from 1 to 5 times the average profits, depending on how steady and predictable the income is expected to be, how competitive the industry is in your area of the country and how easy it would be for a competitor to enter. .
Jun 19, 2014
Unfortunately, that is an ignorant comment because it ignores the role that intangible assets that are not recognized on the balance sheet play in the value of a company. Depending on the circumstances, a construction company can have significant intangible value. For example, look at the price-to-book ratios for publicly-held home-builders: Toll Brothers (TOL - 1.73x), Beazer Homes (BZH - 2.26x), D.R. Horton Inc (DHI - 1.52x), Lennar Corp. (LEN - 1.99x), KB Homes (KBH - 2.65x), Rylander Group Inc. (RYL - 1.87x), and NVR Inc. (NVR - 3.85x). Each of those has significant intangible value that your idea overlooks.
In addition, rules of thumb are of no use to any valuation professional who has a clue, so "1 to 5 times the average profits" is just hogwash. That's why the acronym for rules of thumb--ROTs--sounds so appropriate.
Apr 22, 2014
I agree with the other comments that stress you need to consult a professional who has provided this service in family law situations. This will carry much weight with the court and, if your soon to be ex wife has even a decent attorney, you can almost bet that they will do the same.
Best and most comprehensive answer I have read.