Presentation on theme: "Business Valuation Seminar NAME TITLE Principal Financial Group Date, 2013."— Presentation transcript:
Business Valuation Seminar NAME TITLE Principal Financial Group Date, 2013
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Insurance products from the Principal Financial Group ® are issued by Principal National Life Insurance Company (except in New York) and Principal Life Insurance Company, Des Moines, IA 50392. t1208050032
The Tailored Edge You Need Our Business Owner and Executive Solutions offer you the complete package – the expertise to help you find the right solutions, a portfolio of products to choose from, and the plan administrative services you need to focus on your business, and leave the details to us.
What’s The Business Worth? Fair Market Value - the price at which the property would change hands between a willing buyer and a willing seller Would you sell your business interest today for this price?
Business Valuation Methods Book Value Formula: –Capitalization of Earnings –Years Purchase Method –Discounted Future Earnings Comparables
Book Value Simple to calculate Not a reflection of the true value Formula: Assets - Liabilities
Capitalization of Earnings Easy to use Assumes earnings will remain stable Formula: Net annual earnings ÷ Capitalization rate = Total value of business
Years Purchase Method Common method Sample Formula: Average annual earnings x Factor + Book value = Total value of business
Discounted Future Earnings This formula method estimates the future earnings of the company and discounts them back into today’s dollars. Often used with mergers and acquisitions Sample Formula: Present Value of 2013 Earnings + Present Value of 2014 Earnings + Present Value of 2015 Earnings + Present Value of 2016 Earnings = Total Value of the Business
Comparables Experts or appraisal firms use data regarding the history and trends of particular assets or comparable businesses to determine an appropriate value
Business Value Drivers Focus on increasing cash flow Develop operating systems that improve sustainability of cash flows Document sustainability of earnings Plan to retain key employees Pay down debt Solidify and diversify customer base Implement a strategy to grow the company Build a solid management team, and groom a successor
Who Performs Valuations Business Appraisal Firm Business Broker or Investment Banker CPA Financial Professionals
Let Us Help The Principal Financial Group can help! … and it’s free to you
Informal Business Valuation Services The Principal Financial Group offers free informal business valuations
What Is an Informal Business Valuation? The Principal creates customized reports based on a review of the documents you provide. We provide a complimentary informal business valuation using five commonly used valuation methods. A Starting Point for discussions with tax and legal advisors
Who is a Good Candidate for an Informal Business Valuation from the Principal? Good Candidates Manufacturing Construction Professional Service Information Technology Healthcare Providers Profitable Businesses
Need for Valuation Services Buy-Sell Planning Exit Planning Estate Planning Executive Benefits Other
Will You Be Taxed On This Or This? Do You Have a Buyer? What Does Your Buy-Sell say the value is? Will this hold If Your Key Person Leaves?
#1: Buy-Sell Planning Implementing a well-crafted and funded buy-sell agreement is the foundation of a healthy business.
Buy-Sell Agreements Common triggering events: –Death –Disability –Bankruptcy/Insolvency –Divorce –Termination of Employment (voluntary and involuntary) –Retirement
Agreements between Owners Common pitfalls No formal agreement Poorly structured agreement No funding Antiquated agreements
#2: Exit Planning When do you want to exit the business? Who do you want to transfer the business to? How much do you need?
Sale to Insiders OR Outsiders Common Techniques Buy Sell –Stock or Assets –Cross Purchase or Redemption Capital Transfers –Compensation and Benefits –ESOP –Recapitalization Gift –Charitable –Family
“…[Business owners] are finding that their plans to sell their business and retire on the proceeds must be delayed, if not abandoned.” “People who wanted to sell their business three years ago are somewhat regretful…” Finding an Alternative to Selling and Retiring New York Times, August 6, 2010 The Best Laid Plans ….
Even if the Business is Sold, Replacing the Income is Difficult Higher taxes and lower yields reduce potential income from reinvested sale proceeds BoomBust Sale Price of Business$15,000,000$10,000,000 Capital Gains Rate/Tax Amount15%/$2,250,00024%/$2,400,000 Net Proceeds$12,750,000$7,600,000 Yield %@5%@2% Pre-Tax Income from Proceeds$637,500$152,000
#3: Estate Planning Now is the time to review your Estate Plans.
Transfer Taxes 2012 Gift and Estate Tax Exclusion amounts$5,120,000 Maximum tax rate35% 2013 Gift and Estate Tax Exclusion amounts$1,000,000 Maximum tax rate55%
Who Pays Estate Tax? The Cost of Compromise: Impact of the 2011–2012 Estate Tax, by Antony Davies 67 percent of estates subject to the estate tax are farms or small businesses
#4: Employee Benefits Who is the difference maker in your company? Immediately change operations, customer relations, profitability Significant recovery time
Hiring, Retaining, and Incenting Key Employees Compete with compensation and benefits Consider customized benefits Align commitment with vesting Tie performance to reward Futures in-sync