The Dangers Of Oversimplifying Your Company’s Valuation Question
It’s always a pleasure to speak with a landscaping company owner who has read something I have written, and who has engaging follow-up questions. One such inquiry came in this week and I found it so valuable that I share it with you today.
This owner said that he and his partner were discussing valuation considering their plan to sell some shares to a family member involved in the business, and wanted clarification on an article I had written in 2019 related to business valuation. Here is my (condensed) response:
Since replying to your specific question without acknowledging the context you provided might imply that it would be right to establish your company’s value that way, I’m sending a few additional considerations that you may find helpful.
The short answer related to my article is that the numbers on the chart were referring to businesses having an enterprise value of $5 to $50 million. Those numbers are generic and four years old. For such an important outcome, I would urge you not to rely on my or anyone else’s generic, out-of-date article to determine your company’s value (and the related tax treatment of a sale of all or part of the company.).
There are some complex wrinkles that can be avoided if you find a qualified professional to assist you with valuation, ownership transfer and taxation. Your best bet for the valuation would be to ask your CPA if they perform business valuations, or if they would refer you to an accredited business valuation professional to provide you with a Fair Market Value for your company. Fair Market Value is the most used standard of value and is defined by the Treasury Dept. in Revenue Ruling 59-60. It is the value that is used for purposes of estate, gift, and inheritance taxes and ESOPS.
The charts I share are summary results reported by business intermediaries and brokers who work with all sizes and kinds of “Main Street size”* privately held businesses in the survey–not just for landscapers. I used it to show the trend, (larger multiples for larger companies) and not to give the reader a guideline for pricing a company. There is a rigorous set of factors to be evaluated and methodologies to be applied to get to a specific valuation of your company. The estimates in the article are very broad–they are multiples for all companies (not just landscaping companies). Those estimates also do not consider the many other factors which would be part of a business valuation (makeup of revenue, location and market, leadership, etc.) Note also that when discussing the sale of a small block of shares there is also a discount for lack of control that would apply if only a portion of a company would be for sale.
If your CPA does not do “Fair Market Value” Valuations, he or she will know someone who does. The kind of market multiples we talk about for landscaping companies are usually high because they are based on what we’ve seen in the market that a synergistic buyer would be willing to pay. They are willing to pay more because there is more value in the addition of that company to them than others. Typically, the Investment Value is higher than the Fair Market Value and the Synergistic Value is the highest of all. (There are other values too—how about Liquidation Value?)
It is also important that you make sure your tax advisor is involved and helping you achieve your desired result when you sell shares. Will you get capital gains treatment for a partial sale? for example. I would also encourage you to check whether you have an up to date buy-sell agreement in place to protect all your owners. Review it regularly to make sure it still works based on current business value and ownership dynamics. Don’t forget you may need/want to have life insurance on each other in case one of you dies and the surviving family members want to have their shares purchased. I’ve spoken to dozens of company owners who put their buy-sell in place 10 or 15 years ago and haven’t looked at it since. Now that their company is worth $10 million versus $2 million, paying a survivors’ benefit can be much more difficult!
The good news is that this company has a new generation entering the company’s ownership! They are to be congratulated! Many owners only dream of having a fully engaged next-generation leadership team.
If you would like to discuss valuation for your landscaping business, feel free to give me a call. If you haven’t started your exit planning and want to begin the process, let’s talk. If you already know you want to sell your business or buy another, please give us a call to discuss how we may be able to help you with that process. You can reach me via email: firstname.lastname@example.org or on my cell phone a: 224-688-8838. We’re here to help you Harvest Your Potential!
*Typically used to refer to “small and medium-sized” businesses with annual revenues of $20 million or less but the definition varies among advisors, private investors, and other intermediaries. I’ve seen anything from $2 million annual revenue and below called Main Street and up to $50 million in annual revenue also called “Main Street”.