Jason No Comments

What Does Your Business Value Tell You?

No one wants to spend money on something they don’t need. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?

You may not — if you fall into one of two groups:

  • Owners who are sure that their business exits are more than 10 years away.
  • Owners who are certain that the value of their companies is miniscule compared to what they will need upon sale or transfer.

Many owners, however, look to the value of their businesses as the chief source of liquidity for their post-exit lives. We intend to leave as soon as it is feasible rather than when we are completely burned out. Therefore, most of us need to know the value of our companies now so we can be smart about creating greater business value in as short a time as possible.

Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:

  1. An estimate of value establishes your starting line and distance to the finish.
    An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
  2. An estimate of value tests your exit objectives.
    An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
  3. An estimate of value provides important tax information.
    First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
  4. An estimate of value gives owners a litmus test.
    When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal may enable owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Pursuing exit plan success all begins with a starting value.
  5. An estimate of value provides an objective basis for incentive plans.
    As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can work towards a successful exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.

This is Not a Full-Blown Valuation!

We know you are thinking, “How much is this going to cost me?” But we’re only suggesting that you need an estimate of value to establish a benchmark, not the opinion of value which may precede your transfer of ownership, years from now.

Estimate of Value

An estimate of value typically:

Costs about half as much as a standard valuation opinion,

Is the basis for the (later and) complete valuation, but

Lacks the supporting information contained in a written opinion of value, and

Is used for planning only. It cannot be relied upon for tax or other purposes.

Failure to Value

On some level, we all recognize that we will leave our businesses someday. While you may not yet have a vision for the second half of your life, you do understand that the exit from your company is likely to be the largest financial transaction of your life. Does it make sense to go into that transaction and into the second part of your life without an objective understanding of your company’s value?

An estimate of value can save precious time as you build value and pursue the exit of your dreams.

If you would like more information about the role of business valuation in Exit Planning, please contact us.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Jason No Comments

The Secret Wall Street Doesn’t Want You to Know

I am not endorsing any political views, but I did note an observation made by Bernie Sanders in the recent Democratic presidential primary debate. He stated that Wall Street’s “business model is greed and fraud.” There’s a lot of data supporting that view.

A history of unethical conduct

The Securities and Exchange Commission (SEC) compiled a list of enforcement actions that led to or arose from the financial crisis. Here’s a small sampling:

Citigroup – The SEC charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the housing market in which Citigroup bet against investors as the housing market showed signs of distress. The court approved a settlement of $285 million, which will be returned to harmed investors.

Deutsche Bank AG – The SEC charged the firm with filing misstated financial reports during the financial crisis. Deutsche Bank agreed to pay a $55 million penalty.

Goldman Sachs – The SEC charged the firm with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. Goldman agreed to pay a record penalty in a $550 million settlement and reform its business practices.

J.P. Morgan Securities – The SEC charged the firm with misleading investors in a complex mortgage securities transaction just as the housing market was starting to plummet. J.P. Morgan agreed to pay $153.6 million in a settlement that enables harmed investors to receive all of their money back.

Merrill Lynch – The SEC charged the firm with making faulty disclosures about collateral selection for two CDOs that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO. Merrill Lynch agreed to pay $131.8 million to settle the charges.

Even though penalties ordered or agreed to as a result of misconduct surrounding the financial crisis exceed $1.9 billion, the fines paid by these firms and others amounted to little more than a slap on the wrist.Many believe it’s back to “business as usual” for them.

Perpetuating a belief in an expertise that doesn’t exist

That “business” means persuading you to give them your money to “manage.” This is no mean feat. The data is overwhelming that the securities industry does not have the expertise to “beat the market” reliably and consistently. A recent Standard & Poor’s Indices Versus Active (SPIVA) scorecard found that over the one-, five- and 10-year periods ended Dec. 31, 2014, more than 80 percent of large-cap actively managed funds failed to deliver incremental returns over the benchmark.

Think about that information. The S&P 500 index consists of the 500 largest and best-known publicly traded companies in the United States. To “beat the benchmark,” all active managers have to do is overweight the winners and underweight the losers. As my colleague, Larry Swedroe, recently noted, 2014 gave them plenty of opportunity to do so. There were vast differences in the returns of the 10 best-performing and the 10 worst-performing stocks in the index that year.

If active managers had skill, surely more than a small minority would have been able to identify the “winners.”

Better alternatives

As I previously discussed, investors familiar with this hustle have a far better alternative. They can simply refuse to entrust their money to those with no demonstrated expertise. Instead, they can choose to become evidence-based investors and capture global returns using low management fee index funds.

This prospect is Wall Street’s worst nightmare. It has marshaled its vast resources and is fighting back witharticles extolling the purported benefits of active management.

Meritless advice

Jim Cramer leads Wall Street’s charge. Here’s the “advice” he gave in a September 2015 article to those just starting out on their investment journey. It’s so irresponsible that I want to quote it.

Cramer is credited as saying that he believes a diversified portfolio of five to 10 individual stocks is the best way to maintain a portfolio.

The article then goes on to quote him directly: “Now, before you start picking stocks, you need to forget everything you’ve ever heard about that classic piece of so-called investing wisdom, buy and hold. We don’t buy and hold here on ‘Mad Money’ — it’s a great way to lose your shirt.”

As usual, Cramer referenced no data to support these views. In reality, the latest research indicates that, for investors in U.S. equities, to be confident of reducing 90 percent of diversifiable risk 90 percent of the time, the number of stocks required is, on average, about 55. In times of distress, it can increase to more than 110 stocks.

Investors can easily reduce risk through appropriate diversification by purchasing low management fee index funds.

Cramer’s observation that a “buy and hold” strategy is “a great way to lose your shirt” is also belied by the evidence. For the period from Dec. 31, 1993 through Dec. 31, 2013, the average investor had an annualized return of about 2.2 percent. Investors who “bought and held” an index fund tracking the S&P 500 earned 8.5 percent, less the low management fees charged by the fund.

Ironically, the best way to “lose your shirt” might be to follow Cramer’s stock picking advice. In a well-reported debacle, on April 6, 2015, Cramer gave his hapless viewers a list of 49 stocks to “buy right now.” Six months later, only 28 percent of them closed higher than their April trading price. In just six months, investors who followed Cramer’s advice lost 7.09 percent of their money.

Once you recognize that Cramer and many others in the financial media are just shills for an industry that wants you to chase returns, buy and sell stocks and bounce in and out of the market, you will have made a giant step toward investing in an intelligent, responsible — and evidence-based — manner.

This commentary originally appeared December 8 on HuffingtonPost.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.


Dan Solin is director of investor advocacy for the BAM ALLIANCE.

Dan is a New York Times bestselling author. His latest book, The Smartest Sales Book You’ll Ever Read, was just released.

The author of several books on investing, his Smartest series includes:

• The Smartest Sales Book You’ll Ever Read
• The Smartest Investment Book You’ll Ever Read
• The Smartest 401(k) Book You’ll Ever Read
• The Smartest Retirement Book You’ll Ever Read
• The Smartest Portfolio You’ll Ever Own
• The Smartest Money Book You’ll Ever Read

In addition, he writes financial blogs for The Huffington Post, Daily Finance, Advisor Perspectives and USNews.com.

Dan is a graduate of Johns Hopkins University and the University of Pennsylvania Law School.


Jason No Comments

12 Books Every Investor Should Own

Larry Swedroe, Director of Research for the BAM ALLIANCE 1/7/2016

Does reading more books appear on your list of New Year’s resolutions? If so, check out this excellent guide to 12 great books that every investor should own and pick up Larry Swedroe’s “The Incredible Shrinking Alpha” in 2016.

Find it on USNewsandWorldReport.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of Hoffman & Associates, Inc. or the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.