Common Valuation Issues That Can Happen During the Bankruptcy Process
Last year, over 22,700 businesses filed for bankruptcy in the United States. Unfortunately, bankruptcy is just a reality facing many businesses with the outbreak of COVID-19. Companies big and small across all industries are at risk. Startups can face bankruptcy just months into their operations, and large corporations are also susceptible to bankruptcy even after decades of business.
You have seen the headlines. In 2018, a majority of notable department stores had no other choice but to close their doors. Last year, other major retailers followed in their footsteps and declared bankruptcy — Forever 21, Payless Shoesource, and Barneys New York, just to name a few. Other companies like Purdue Pharma and Pacific Gas & Electric (PG&E) also filed for bankruptcy last year.
When a company files for bankruptcy, which can either be voluntary or involuntary, it is either resolved through a Chapter 7 or Chapter 11 procedure. Under Chapter 7, which is known as a “liquidation” bankruptcy, a trustee takes control of the debtor’s assets, liquidates those assets for cash, and distributes the cash to the creditors. On the other hand, Chapter 11, which is known as “reorganization” bankruptcy, allows a business to continue its operations while also repaying creditors through a court-approved plan of reorganization.
Whatever route your business must go, a valuation plays a key role in the process. Yet, due to the complexity of a valuation during the bankruptcy process, there are some common valuation issues that can arise.
The feasibility of the Chapter 11 plan confirmation
A business can only emerge from a Chapter 11 bankruptcy if a plan of reorganization is submitted to the court and also approved. A valuation is crucial throughout this entire process, from the original proposal to the negotiations that happen along the way to the finalization of the reorganization plan. A debtor cannot even propose a plan without a valuation, since it informs the total amount that each of the stakeholders will get.
One issue that can arise is whether or not the reorganization plan is actually feasible. The last thing the court wants to do is approve the plan and then, within a few months or years, have the same company refile for bankruptcy again. Here, the valuation expert uses information and projections to determine whether the plan is realistic or not.
Standards of value vs. premises of value
The standard-of-value terminology used in a traditional business valuation is not always the same as how it is used in a valuation for bankruptcy purposes. Similarly, the premise-of-value decision during the bankruptcy process may require court involvement. The wording you use has a significant impact on the valuation and, as a result, the outcome.
These are just a few examples of issues that can arise during the bankruptcy process. If you need to talk to a certified appraisal expert with years of experience conducting valuations for companies filing for bankruptcy, contact us!
A Look Into the Nuances of Business Valuations for Tax Season
There are a multitude of reasons to get a business valuation. Determining the tangible and intangible assets of your business is always important, whether you are shaping your business strategy, getting ready to acquire another business, or buying out a partner. Business appraisals are a complex process, so companies look to certified third-party valuation firms to ensure their data is accurately represented in their valuation.
This is especially true when a valuation is conducted for tax purposes, which introduces additional layers of complexity into the process. A business valuation becomes more elaborate when you consider multinational companies who operate globally. Certain intercompany factors need to be addressed to comply with your tax reporting, and these factors are typically determined by the income approach since the other approaches (market and asset) can be more limiting.
Here is an example scenario: A company just acquired another company’s stock. They plan to transfer patents to an entity that is located outside of the country, so they need to obtain a valuation of each patent. The products that are protected by these patents will be sold to customers and related parties, and these sales will be controlled by intercompany transfer pricing agreements.
When doing a business valuation for tax purposes, some of the factors that must be explored include intercompany transactions, the nature of the entity, transfer pricing, intellectual property, and tax rates. Below we will take a look at each.
Intercompany transactions
This data is vital, yet often misunderstood. These can include financing, sales of a company’s goods or services, and how they are using their intellectual property. If these are not included, your business can be severely undervalued. It also raises red flags and could get your company in trouble with the IRS.
Nature of the entity
The nature of the entity guides the entire valuation process. Commonly, this impacts holding companies that have minimal operations, intangible holding companies, and full-service operating companies. Different approaches are used depending on the company in order to accurately determine value.
Transfer pricing
This is another vital but overlooked part of a business valuation. It is important to make sure that these factors (profit margins, revenue, etc.) are consistent so the data is not contradicting.
Intellectual property
In certain circumstances, some entities do not maintain IP rights, while full-service entities do. Without IP rights, an organization may have lower profit margins and risk. IP needs to be accounted for in a business appraisal.
Tax rate
If an organization keeps its earnings in the country it is located in, you have to consider the tax rate of the specific area. However, if that company will repatriate its earnings back to the U.S. shareholder, you must consider U.S. tax rates and understand how to report for foreign tax credits.
It is important to eliminate potential tax issues that could arise with an inaccurate business valuation, so make sure you are working with an independent valuation firm you can trust.
If You Are Buying a Company, Consider an Equipment Appraisal
When you are in the process of buying another company, there is a lot to prepare for. Top of mind are usually all the short and long-term factors, like the transition period, operations, profit, and assets. While these are all important, what often gets overlooked is an equipment appraisal.
Many individuals do not realize just how important equipment appraisals are to their company’s bottom line. In fact, some individuals fail to see the value of equipment beyond its typical day-to-day usage. When you are on the hunt for what business to purchase, make sure you get an equipment valuation before you sign the dotted line. The appraisal will provide you with a significant amount of information, which will ultimately inform whether or not buying a specific company is a good idea. Below are a few reasons why you should consider an equipment valuation completed before you purchase another business.
Determines the condition of every piece of machinery
When it is time to prepare your necessary documents for the upcoming tax season, the equipment you use at your company is depreciated on a specific schedule. But we all know that the condition of a piece of machinery is impacted by a multitude of factors. Equipment that is completely depreciated can actually last for a few additional years, while machinery that follows the standard depreciation schedule could give out years before it is expected.
Provides maintenance records
An equipment valuation not only gives you an understanding of the life of your machinery, it gives you a comprehensive understanding of each piece of equipment. Part of the appraisal process can include diving into previous maintenance and repair logs. This insight is important, as you can see if everything has been properly maintained during its lifetime. If there are multiple pieces of equipment that are in poor condition, it should influence your buying decision. Fixing and replacing large machines is costly, so a valuation can give you leverage to negotiate the final sale price.
Prepares you for the future
If you know the condition of the equipment and whether every item has been correctly maintained, you will have a better idea for what future costs you should prepare for down the road. This helps to ensure that there will not be a high number of surprising (and expensive) costs so that you can budget more accurately.
An equipment appraisal is a small part of looking into buying a company, but it is also a crucial part of the process. Because an equipment valuation can be important, you should also take careful consideration into the firm you are hiring to conduct your equipment appraisal. Here at Appraisal Economics, we have conducted a wide range of equipment valuations, including appraisals for hospital equipment and power generation machinery.
Focused on Digitization? Make an IT Equipment Appraisal Part of Your Growth Strategy
Digitization is no longer a commodity in today’s competitive business landscape. If it is not one of your top priorities, you are putting the health of your organization in danger. But any efforts to become more digitized should not stop with the tools themselves, or even with the strategy on how to properly implement the technology. Whether you are a small startup or a multi-million dollar business, it is crucial that you work with a certified appraisal company to value all of your IT equipment.
Business appraisals provide critical information that is necessary to ensure your company is protected. When you are considering buying out a partner, expanding your global reach, or considering strategies that will grow your revenue, business valuations are key. But it is just as important to value the smaller assets of your company as well. IT equipment appraisals can impact your company’s bottom line in ways you may not even realize.
You might think that some of your equipment is already obsolete given how quickly new technologies are released, but do not make the mistake of undervaluing your older equipment. Some companies are willing to buy a business’ older equipment when they are looking to get rid of older items in preparation for an upgrade. On the other hand, if you are looking to purchase another company’s equipment for your own internal use, getting their equipment appraised will ensure you are not buying equipment that barely has any life left in it.
Additionally, an equipment appraisal could showcase that the equipment you have, even if it feels a bit older, is still functional and can serve your operations well. This all depends on how you store and care for your equipment, of course.
As you begin doing your research for an appraisal company, look into the types of valuations they have done in the past. If they have experience doing equipment appraisals for numerous companies, they are going to know what to look for and be the most accurate when it comes to pricing your items. Working with certified appraisals eliminates the potential of being taken advantage of for someone else’s gain, which is why you should never seek the advice of an equipment vendor who would only have their best interests in mind.
Getting an equipment appraisal for your company’s computer assets will have an impact on your growth and longevity, as it eliminates risk and also provides you with a framework for profiting off your technology as well.
Goodwill Can Increase Your Company’s Value: Here Is How
There are certain aspects of a business that can be easily seen and measured. These tangible assets are unambiguous, and making sure they are represented in an accurate business valuation is critical for a multitude of reasons. Business valuations not only guide your business strategy, they are also necessary for tax and financial reporting, as well as for instances when you are planning on buying out a partner or selling the company. It is important to know what your company is worth.
However, you know that the value of your business is more complex than just your property, equipment, assets, working capital, and more. There are other factors that must also be measured in order to have a complete and comprehensive valuation. Is your company known as a stand-out hub for innovative new ideas, products, or services? If your industry is booming and it is anticipated that the market will have a promising future, being a top contender in your industry could increase your company’s value beyond what it might have normally sold for.
Similarly, if you have a very large following of loyal customers and a reputable standing within your community, this can also increase your value. You spent decades cultivating relationships, and if someone is looking to buy your company, they will see this influence and leverage as an investment opportunity. A potential buyer would be willing to pay more for your business over another just because of your well-established history.
The goodwill of a company has a direct impact on its valuation. Yet, these intangible assets are more complex to measure than your tangible assets. To calculate your business’ goodwill, you would determine the fair market price of your liabilities and assets, deduct that number from the final sale price, and what is remaining would be your total goodwill. However, not only is it difficult to know all the factors that could be considered goodwill, it is also difficult to ensure they are accurate. You want to make sure you are not undervaluing yourself, but you have to also make sure your valuation can withstand possible scrutiny in the event you have to deal with legal or insurance disparities.
When you work with a certified business appraiser, you can have peace of mind knowing that all of your tangible and intangible assets can be accurately represented. At Appraisal Economics, we understand all of the aspects that could influence your company’s goodwill and overall value, and our comprehensive reports will provide you with the necessary appraisal documentation to have on hand whenever you may need it.
Why You Should Get a Business Valuation When Buying Out a Partner
When you first started your company, both you and your business partner were crucial to its success and longevity. Fast forward to today, your business partner has decided to transition away from the company. This could be for a number of reasons. More commonly, the partner wants to move on to a new venture or they are looking to retire. In some instances, however, they are either no longer aligned with your company’s vision or there has been a falling out of some kind.
Whatever the situation, you now have to take the right steps to ensure that when you buy out your business partner, it is not only favorable for all parties involved, but that the buyout will not negatively impact the company in any way. Partnership buyouts are expected to increase with more baby boomers planning their retirements and younger generations looking to make more lucrative career moves, so make sure you are prepared when the time comes.
Determining the value of each partner
Even if the buyout began on friendly terms, disputes about the process can quickly make the partnership buyout less civil. The easiest solution would be to follow the terms outlined in the buy-sell agreement that both parties settled on when initially forming the partnership, assuming it was drafted in a fair manner. This agreement typically speeds up the buyout process and ensures there are fewer arguments and risks along the way. In some cases, there is no initial buy-sell agreement, which means that each partner will need to agree on the value of each other’s shares in the business. If one partner has been more involved in the company’s operations and growth, a higher payout could be expected.
It can get complicated if each partner establishes a valuation without professional knowledge or expertise and tries to buyout the other partner using the average of undervalued or overvalued numbers. Either the numbers will be vastly different, or both partners might not agree on a final number. This is why it is important to work with a third-party valuation company such as Appraisal Economics. We have an unbiased approach to every valuation we conduct, and the methodologies we use to determine value are fair and credible.
Getting back to business
When a partnership buyout can be settled quickly and with no animosity, it allows you to get back to business as usual. Knowing that the departing partner has received a fair share of the business, he or she is more likely to do what is necessary to ensure that business operations continue to run as harmoniously as possible during this transition phase. Contacting clients and updating them about the partner who is leaving prepares them for any upcoming changes. Detailing the responsibilities of the partner helps to decide what tasks you will take over and what potential staffing decisions you need to make to avoid any discrepancies in operations and performance.
The process of buying out a partner is faster and more preferable when you use a certified business valuation specialist. Keep this in mind as you consider forming another business partnership in the future. Initially establishing a buy-sell agreement with a new partner and a third-party valuation company will prove better for everyone in the long-term.
Best Practices For Maintaining Your Trademark
In an effort to protect your business, you registered your trademark with the U.S. Patent and Trademark Office. If approved, you were issued a federal registration number. Now that you have taken that necessary step in the preservation of your brand, your business is protected for the rest of your tenure, right? Not exactly.
Registering a trademark is just the beginning of the journey, not the final step. It ensures that you are legally protected against infringement, but it is possible to have your registration canceled. If this were to happen, your only option would be to file a new application and start the process over again from the very beginning. However, repeating the process does not guarantee that your trademark will be re-registered, even if it was approved the first time.
The only way to look after your brand is to maintain and defend your trademark in order to keep it alive. Here are a few best practices:
Know your renewal dates
Part of maintaining your trademark is to prove that you are actively using it. The U.S. Patent and Trademark Office (USPTO) actually requires you to regularly submit file renewals that demonstrate your continued trademark use. If you miss the renewal date by over six months, they will cancel your trademark. Since the USPTO only sends one email reminder, it is best to mark the renewal dates on your calendar:
- Your first renewal is due 5 years after your registration date
- Your second renewal is due 9 years after your registration date
- After that, every renewal is due 10 years after you submitted the second renewal
Monitor new trademark filings
Just as having a trademark is good for brand value, having other companies try to infringe on your trademark can actually have adverse effects on your overall brand. It is not under the USPTO’s purview to monitor all filings, so the responsibility of tracking new trademarks falls on your shoulders — or this can be done by a trademark attorney as well. Make it a point to regularly search the USPTO’s database and if you notice any that are too similar to yours, you can file an objection.
Your trademark should evolve with your brand
Just as you should never have a “set it and forget it” mentality towards your trademark, you should also never let your trademark fall stagnant. Registering your trademark early is the best strategy, but you should also be mindful of your future goals for new product development or any plans of expansion. If your company decides to modernize your current logo or packaging, for example, make sure those changes are also reflected in your trademark.
In addition to maintaining your trademark, it is also crucial to have your trademark valued as well. This not only gives you a competitive edge, it is also necessary when looking ahead and planning for other factors such as: trademark sale and/or purchase, tax reporting, determining royalty rates, and bankruptcy, among other reasons.
Purchase Price Allocations: Accuracy is Critical
To comply with generally accepted accounting principles (GAAP), companies know there are a lot of rules to follow for financial reporting purposes. Are you planning to acquire or merge with another business? Business combinations and acquisitions is an area where adhering to GAAP requirements necessitates special attention.
These rules have evolved through a variety of names (the current being ASC 805), but these standards are more commonly known as purchase price allocations, where a company looking to acquire another company allocates the purchase price into liabilities and assets from the transaction. An acquirer must report the fair values of the acquired tangible and intangible assets, which must be reflected on the opening post-acquisition balance sheet. Tangible assets typically include equipment, property and inventory. Understanding what constitutes an intangible asset, however, is more mystifying to many business owners. Here is a framework to better categorize identifiable intangible assets:
- Marketing-related (trademarks, trade names, domain names, noncompete agreements)
- Customer-related (customer relationships, customer lists, production backlogs)
- Artistic-related (patents, literature, photographs)
- Contract-based (permits, franchise agreements, leases, employment contracts)
- Technology-based (copyrights, trade secrets, software)
These values are regularly adjusted to accurately reflect depreciation and amortization charges. Intangible assets that are not amortized, such as goodwill and in-process research and development, must be tested for impairment on at least an annual basis.
Why is accuracy so critical?
A purchase price allocation impacts the tax balance sheet, which is used as a basis for annual tax depreciation and amortization changes, but a PPA also impacts profits that determine the taxes paid and returned to investors and owners.
Depreciation and amortization can either be overstated or understated, which has a direct impact on whether net income is higher or lower. If a PPA is not entirely accurate, it can also result in a future impairment of intangible assets, which would be a loss on financial statements. Of these inaccuracies, some of the consequences can happen immediately, but others could happen years down the road. The company’s bottom line, an investor’s perception of the business, and future profit are all areas that stand to be affected by an inaccurate purchase price allocation. PPAs provide far greater transparency for investors, as well as a more detailed look into each component of a company’s value.
At Appraisal Economics, we have a deep understanding of the reporting requirements that will withstand SEC and audit scrutiny. If you want to make sure your purchase price allocation is accurate, choose the experienced professionals who have the requisite experience to provide accurate documentation.
Not-For-Profit Organizations Need Appraisals Too (Here Is Why They Are Important)
If you run a large corporation, a business valuation is a critical part of your overall operations. The valuation process of a for-profit business is fairly straightforward, although some of the specifics of appraising assets and assessing income and debts to come up with a number that accurately represents the value of the business can make the process a bit more complicated. However, this process becomes even more complex when conducting a not-for-profit valuation.
The goals of a not-for-profit differ from for-profit companies. These businesses dedicate their services to making a difference in the community without focusing on turning a profit. While their goals vary, a business valuation is just as vital to their operations as it is for any company. Here are a few examples of organizations we have done not-for-profit valuations for and why these valuations are so important to their stature:
- Charities: Estate and tax considerations go into establishing Charitable Remainder Trusts, which means that the value of your stocks and other assets need to be appraised.
- Foundations: A valuation is necessary in order to obtain and maintain preferential tax treatment. If your foundation is bound by certain Treasury laws, you also need to know if you are required to distribute a specific percent of total assets annually.
- Healthcare Providers: In most cases, a not-for-profit valuation is required before one of these organizations can convert to for-profit status.
- Schools, Colleges & Academies: You need to value any donations that are contributed to your educational organization so that your records are accurate. This is not only important for your own records, it is also necessary to ensure that donors can receive their proper tax deductions.
Before a not-for-profit can make any important business decision, they need to know their overall financial condition. There may be instances where a not-for-profit can qualify for tax exemptions or preferred tax treatment that will benefit the organization’s margins. The only way to determine this is by completing a not-for-profit valuation. A valuation can also foster special financing options. For example, if you can prove your organization’s value to your bank, they are more likely to approve the funding you need to build a new center or expand your current operations. Similarly, a valuation can ensure you avoid any potential tax penalties. If you overstate the value of previous donations, your organization could owe money, which will depend on the severity of the infraction.
As you continue to look for expansion opportunities, keep in mind that a not-for-profit valuation can also strengthen your overall brand. If the community has a better understanding of your mission, they are more likely to offer their support, whether it is in the form of monetary donations or through volunteer opportunities.
When it comes time to choose an independent appraisal firm to complete a not-for-profit valuation for your business, make sure you are choosing the right professionals. The approach a firm uses to determine value depends on the goals and objectives of your not-for-profit organization. At Appraisal Economics, we have decades of experience appraising not-for-profit companies, and we understand what methods to use in order to determine fair market value.
Are There Benefits to Desktop Equipment Appraisals?
As a business owner, your time is already mostly accounted for each week. When an additional task pops up, it is often difficult and inconvenient to try to navigate how to fit it into your schedule. There are some tasks that can be pushed around to other weeks, but others, like an equipment appraisal, require immediate attention.
Fortunately, desktop equipment appraisals can offer some flexibility so you do not have to worry about sacrificing your schedule during the process. Instead of scheduling an in-person visit with an appraiser, business owners can send pictures and specifications about their equipment to an expert who will analyze the items at their office. In addition to saving time, desktop equipment appraisals also have other benefits for companies.
A cost-effective option
For businesses that need to be cognizant of how and where they spend their budgets, a desktop equipment appraisal can provide value with less cost. Since the appraiser is not visiting your business to value a piece of machinery first-hand, it eliminates any travel expenses that would typically accrue otherwise. An owner will be able to obtain sufficient documentation of what their piece of equipment is worth, which can then be used for a number of reasons.
Process a larger amount of equipment
Since desktop equipment appraisals are beneficial for finding out the worth of more standard pieces of equipment, they can quickly help you understand the value of larger amounts of the same equipment. For example, if you bought multiple semi-trucks around the same time, you can use these appraisals to figure out the total worth without having to have someone come out to inspect them all. You will still need to provide the appraiser with certain information, like the mileage and ID numbers of each truck, since each one needs to be individually appraised, but it is a faster, more efficient way to get a ballpark figure on similar items.
What does the appraiser need from you?
As mentioned above, desktop equipment appraisals work better with standard equipment within your industry. When undergoing a desktop appraisal, you will need to provide your appraiser with as much information as possible. This includes a detailed description of the asset(s) you need appraised, so they can begin conducting the appropriate research on the item in question and high-quality photographs that accurately represent the condition of the equipment, among other information. You will also need to appoint someone who the appraiser can speak to if they have any additional questions about the equipment.
When is a desktop appraisal not appropriate?
Desktop equipment appraisals do not give a totally accurate representation of worth, which is fine in some cases, but not suitable in others. If your equipment is in question due to a contested court case, you will need to schedule an in-person site visit with a certified appraiser.