Can I use rules of thumb to value my company?
Industry rules of thumb used by business owners to determine value usually give misleading results. Rules of thumb are formulas based on industry averages of companies sold using their sales price compared to either annual sales revenues or profits. As such, the actual sales price of an individual company is either higher or lower than the average. Seldom does a company’s value fall right on the average. Furthermore, the value determination for a company up for sale will be different than the value determination made for purposes of divorce or for an estate tax calculation. These distinctions relate to the purpose of a valuation, which affects methodology and certain assumptions made by the valuator. All these distinctions impact value determination.
How much time does it take to prepare a business valuation?
To perform a thorough analysis, make a qualified value determination, and prepare a proper report communicating the results of he business valuation easily requires 40 to 60 hours of work. Peculiar circumstances such as difficulties obtaining needed information, a unique and/or specialized industry, or a litigious situation requiring special care and preparation will often require more time to prepare the valuation. Click here to review the general procedures used to perform a business valuation.
Is book value a good indicator of company value?
Book value is almost never a good indicator of the value of a business, and usually much lower than the true value. Book value generally reflects only the cost of the company’s tangible assets net of depreciation and liabilities, ignoring appreciated asset values and company intangible values such as goodwill.
Do values of privately held companies correlate with values of public companies?
Values of privately held enterprises are generally not comparable to publicly held enterprises for at least two distinct reasons:
There is not a ready market of investors to buy stock in a private company. As such, in the value determination the valuator oftentimes deducts a “lack of Marketability Discount” from the company value determined to adjust for the cost required to take the company public and/or sell the business through a broker.
Most privately held companies are much smaller in size than public companies. This increases the risk of ownership, or investment, in the enterprise. Consequently, the expected rates of return used by an investor, or prospective owner, to value a privately held business are typically higher than returns anticipated with ownership in a public company.
Can I really expect to receive much value out of my company when I retire?
Historically, owners of private companies have looked to cash flows and tangible assets for company value, with little consideration given to the goodwill of the enterprise. Consequently, at retirement they get less value than what otherwise might be possible, by selling only the tangible assets of the business or simply liquidating inventories and closing their doors. The fact of the matter is, much of America’s wealth is tied up in privately owned companies and is attributable to business goodwill. These observations are further supported in a study of privately held companies conducted by Robert Avery and Michael Rendall at Cornell University and referenced by the WallStreet Journal in June 1996, with the following quote:
“The greatest transfer of wealth in history will occur in this country over the next decade; an estimated $10 trillion is expected to change hands, and much of this wealth is tied up in family business stock.”
What is forensic accounting?
Forensic accounting, also known as investigative accounting, is a detailed examination and analysis of financial documents and records for use as evidence in a court of law. The term “forensic accounting” can refer to anything from the execution of a fraud analysis to the recreation of “true” accounting records after the discovery that they have been manipulated.
What is the typical forensic accountant?
Forensic accountants often share similar backgrounds with tax accountants and auditors. Often times, practitioners segue into forensic accounting after years of specializing in other accounting areas. For all intents and purposes, a typical forensic accountant will:
- Be analytically-minded and inquisitive, with “street smarts.”
- Be able to think creatively or “outside the box.”
- Be able to multitask and work well under pressure.
- Be able to communicate complex financial concepts in a manner that is simple and easy to understand.
- Usually will hold at least one of the following professional credentials: CPA, CR.FA, CFF, and/or CFE.
Who retains forensic accountants?
Forensic accountants are retained by banks, corporations, government agencies, insurance companies, law firms, and other organizations to identify, analyze, determine, interpret, document, summarize, and present complex financial and business related issues in a simple and concise manner.
How is a forensic accounting analysis different from an audit?
The difference between the public’s expectation of the purposes and objectives of an audit and the CPA’s responsibilities under Generally Accepted Auditing Standards has been referred to as the “expectation gap.” Forensic accounting can help close the expectation gap.
In practice, there are differences in mindset between forensic accounting and audit:
- “Professional skepticism” versus “investigative mentality.” A forensic accountant will often require more extensive corroboration.
- A forensic accountant may focus more on seemingly immaterial transactions.
- A forensic accountant will often look for indications of fraud that are not subject to the scope of a financial statement audit.
How much might it cost for a forensic accounting, business valuation, or analysis of economic damages?
Since our professionals are often retained as expert witnesses in litigated matters, our fees are typically based upon hourly rates. The fees ultimately incurred and charged will depend upon variables such as the complexity of the case, the timing of the required analysis, and the ultimate purpose of our engagement. In non-litigated engagements we can offer fixed-fee arrangements under certain circumstances. In most engagements, we will typically require a signed engagement letter and a retainer amount. Please contact our firm for specific information regarding our fee structure or to receive an estimate for a particular engagement.
How long does it take to complete a forensic accounting investigation or analysis of economic damages?
If the engagement will be a litigated matter, the timing of our analysis will be heavily dependent upon the timing of discovery responses from other parties. Since almost all of our forensic accounting and economic damage analysis engagements are for litigation purposes, it is difficult to provide timing estimates for those engagements without more detailed information. As general guidance, when litigation is not involved, such engagements can often be completed approximately four to six weeks after the necessary documents are received.
If an assignment requires a quick turnaround the overall engagement costs may be higher than usual to the extent that professionals at higher hourly rates will be used more than in a non-expedited engagement. Please contact our firm to receive a timing and fee estimate for a particular engagement.
What are potential red flags of fraud in my business?
We are often retained to review financial records due to suspicion by one party that possible fraud or accounting irregularities are being facilitated by another party. Some of the more frequent observations that lead to the belief that fraud is occurring include:
- The balance sheet doesn’t balance.
- There are minimal or no reported cash sales for a company that might be expected to receive cash on a regular basis, such as a restaurant.
- There are significant and consistent adjustments to the accounts receivable account.
- There is a higher level of sales returns during specific times of the day or during a specific employee’s shift.
- There are significant transactions with related parties or with suppliers whose details are unknown.
- There is no clear separation of accounting duties.
- An employee with control over or access to cash and accounting records refuses to take time off from work.
- There is a distinct difference between an employee’s income and their lifestyle.
- An employee continually claims to rewrite accounting records under the guise of neatness in presentation.
What is litigation support?
In the field of accounting, litigation support means to provide assistance of an accounting nature in a matter involving existing or pending litigation. Often times attorneys need a financial professional that can interpret financial statements and understands complex accounting transactions, as well as state and federal tax codes. Furthermore, accountants that provide litigation support services are usually tasked with issues related to the quantification of economic damages. For example, a litigation support engagement could be the calculation of economic loss resulting from a breach of contract.