A Conversation 

Business Buzz spoke recently with Gary R. Gomola, CPA, CVA, of the Middletown accounting firm of Gomola & DiBella, LLP, about how and why to place a monetary value on a business. Here’s what Gary told us.

Business Buzz: We all know that CPA stands for Certified Public Accountant, but what does CVA stand for?

Gary: The extra initials CVA stand for Certified Valuation Analyst. That means I have a specialty in preparing business valuation reports for closely-held companies. In order to become a CVA you have to be a CPA first, complete a comprehensive training course, and pass a rigorous examination given by the National Association of Certified Valuation Analysts.

Buzz: What exactly is a "business valuation"?

Gary: It’s a report that offers an opinion of the estimated value of an ownership interest in a business entity. It could be the value of the business as a whole, or the value of one person’s partial interest.

Buzz: Why would someone want to value their business?

Gary: Unfortunately, most of our business valuations are performed for compliance or in crisis situations. Most are for divorce or shareholder disputes, where the attorneys or the court wants to know the value of a business for the property settlement. Some are performed on the death of an owner, for estate purposes. I’d like to see more people get their businesses valued for planning purposes—before a crisis hits.

Buzz: What other situations would call for a business valuation?

Gary: The other major areas would be for the sale or purchase of a business, or for the determination of damages in a lawsuit.

Buzz: This may sound simplistic, but what actually constitutes the value of a business?

Gary: Well, it’s a simple question, but very complex to interpret. We usually use "fair market value," which is the amount for which someone is willing to buy or sell a business. Of course, my job is to arrive at that value without actually having the business sold. After doing a lot of research on the particular business and its industry, we use a variety of techniques and methods to try to approximate that value. Then, depending on the situation, we apply various discounts to arrive at our final conclusion.

Buzz: What do you mean by discounts?

Gary: If the valuation technique we used arrived at a freely traded value, we have to take a discount for the lack of marketability, or liquidity. This recognizes the fact that selling a small business is a lot harder than selling shares in a publicly traded company. It could take months, or even years, to find the right buyer for your business—as opposed to the seconds it takes to sell shares of IBM.

The second most common discount is for a minority interest. If you own less than 51% of the equity, you probably lack the ability to control the course of the business and implement policies that could enhance the value. Therefore, your interest may be worth less per share than someone who owns a controlling interest. The size of the discount is determined by the degree of the lack of control.

A lot of business owners enter into buy/sell agreements, make gifts, and do succession and estate planning without first putting a value on the business. Too often, after the fact, the business turns out to have a value significantly different from what they planned on, so their plans fail.

And that’s assuming they have done at least some planning. An awful lot of small business owners have done no estate or succession planning at all. Getting a valuation done would be a great first step in the planning process. I could tell you some real horror stories of what can happen to a family business, and the family itself, because the owners have died without a business succession plan in place. A lot of parents have spent a good portion of their lives and sacrificed a lot in building a business. It’s a shame when the thing they devoted so much to becomes the very thing that rips their families apart when they are gone. This can all be avoided with a good estate plan, including a valuation of the business.

You can find more information on business valuations at www.ctcpas.com/valuation.htm, or at the web site of the National Association of Certified Valuation Analysts at www.nacva.com.