Executives involved in succession planning are well-versed in the business of maximizing a firm’s value prior to potential sales. Profitability is always the name of the game, causing leadership to double down on the usual suspects: winning more new clients and maximizing assets under management. Sadly, even though technology has proven itself as a value driver, helping firms shave costs and grow more efficiently is often overlooked as a key component of the process. Afterall, technology gaps and outdated systems hobble a company’s future outlook, especially in today’s digital economy. When a firm settles for antiquated technology, growth requires the addition of more people, an equation that simply is not scalable.
Technology not only enables a company’s growth, but a fully integrated, scalable firm using modern, cloud-based systems is more valuable, commanding a higher price upon exit. This is especially true when it comes to the adoption of integrated workflow and the automation of back-office processes. This might include well-documented workflow processes, an updated CRM system, scanned documents, and content management software that automates reporting and ensures compliance. In fact, investing in content management software alone can increase the valuation of a firm up to $3.6 million, depending on the organization’s size. Content management technologies save considerable recurring costs by enabling corporations to pay less in overhead costs, store less paper, and hire fewer administrative employees. Automation also helps with record-keeping, which is paramount for succession planning.
Companies that are able to capture data, interpret it, gain valuable business insights, and act upon them are worth much more than companies that cannot. In the current business environment, knowledge is everything, so it is only fitting that companies are assigned value based on how much knowledge they can capture and use to their advantage.
Recently, we have witnessed stronger valuations, business-friendly changes to the tax policy, and the likelihood of rising interest rates, all of which makes the present a favorable time for owners to consider opportunities to sell. But technology is not just an integral piece of the puzzle for future exits. Whether your firm is eyeing a sale, merger, going public, or is simply looking to ratchet up your strategic planning, technology increases the value of your business and helps best position you for transitions of any nature.
All businesses, regardless of end-game or circumstance, need to pinpoint their own value drivers and actively work to increase their business’ value. Ideally, this process should begin with an independent business valuation and result in a 2-5 year strategic plan to help you capture more cash flow in the short term. Such a plan should involve updating all necessary systems, processes, and operating tools, ensuring that you continue to build incremental value for your business. Poor planning can minimize a lifetime of hard work and success. Meanwhile, careful preparation and attention to key business drivers will augment your gains, helping your firm reach its most profitable and prosperous future.
In today’s knowledge economy, intellectual property (IP) truly fuels economic growth. IP includes assets such as copyrights, patents, trademarks, licenses, proprietary technology, contracts, software, databases, R&D, and more. Today, in the United States, IP is worth over $5.8 trillion each year and now consists of over 35 percent of the total economy. IP also accounts for over 74 percent of all US exports, amounting to nearly $1 trillion. Now, more than ever before, business success is driven by ideas and innovation, rather than labor or raw materials.
It is no surprise that corporate valuations have changed to reflect this shift. While it is true that at one time tangible assets like real estate, raw materials, and equipment made up 80 percent of the market value of a corporation, that ratio has completely reversed. Now, it is intangible corporate assets that account for 80 percent of the value of most US companies. This is especially true for companies operating in knowledge-intensive or innovation-heavy sectors, or companies with well-known brand names.
This phenomenon is not exclusive to the United States either. Global businesses have caused innovation to become more collaborative and unfold across borders. In fact, R&D efforts increasingly include emerging economies, and three Asian countries—Japan, China, and the Republic of Korea—are among the top five patent-filing countries.
Intellectual property is more valuable than ever, and your organization’s IP likely comprises your most valuable assets. This can be attributed to the fact that, on average, patented products and services produce 50 percent more return than unpatented ones. That is why patent disputes, sales, and acquisitions have become so prevalent—it is where the money is. Globalization and technology advancements like artificial intelligence and the Internet of Things (IoT) have added layers of complexity to the issues of IP management and enforcement, raising key questions about creation, invention, and ownership, but IP, when managed and wielded properly, also enables global collaboration in the digital world.
Furthermore, when IP is properly protected and promoted, it helps consumers make better purchasing decisions, ensuring that they better understand the safety, reliability, and effectiveness of their purchases. Not to mention the fact that IP helps generate groundbreaking solutions to global problems like health, hunger, and climate change.
While most large, public companies have recognized the importance of regularly protecting and valuing IP, many small or medium-sized enterprises (SMEs) wait too long to get serious about the process, putting them at risk for losing the assets that make up the lion’s share of their business value. Unfortunately, a simple mistake or oversight in this arena can wipe out the viability of a business overnight. Yes, getting proactive about IP in the early stages of your business can feel like an unwarranted expense and time-consuming initiative that is better saved for a later date. But the alternative is much more costly. Ask yourself this question: could your business sustain losing 80 percent of its market value tomorrow? If the answer is no, it is time to take action.
This is why it is so important for companies to seek professional assistance to properly protect and value their trade secrets and confidential business information. IP has long been used by businesses to increase their competitive advantage in the marketplace. It has always been an enabler for successfully bringing products and services to market. Now, however, in our data-driven economy, its value has crossed into a new realm of importance, as it’s widely recognized that IP drives revenue, improves balance sheets, increases stock values, and drives a company’s future success.
Congress introduced the Tax Cuts and Jobs Act (TCJA) in 2017 in modification of the Internal Revenue Code put into place in 1986. This new tax reform ushered in critical changes to the existing American tax code and, as a result, caused many taxpayers to question their current tax strategies. Their main concern: How will the Tax Cuts and Jobs Act impact my charitable giving?
The short answer: quite significantly, actually. Every new law has its own nuances, which is why it is important that taxpayers understand the ins and outs of TCJA. With a stronger understanding of the tax reform, taxpayers can use it as a guide in determining the best giving strategy for their unique situation. In other words, how they can support the same charitable causes while also getting the most out of their earnings.
The Tax Policy Center predicted that the Tax Cuts and Jobs Act would cut the number of households claiming itemized deductions in half—from around 37 million to 16 million in 2018. The reasons for such a severe drop are threefold: the TCJA lowered individual income tax rates, capped state and local tax deductions, and doubled standard deduction amounts. Because individual tax rates were lowered, it started a snowball effect that also reduced the value of other deductions. State and local deductions are now capped at $10,000 and standard deductions nearly doubled to $12,000 for individuals and $24,000 for couples filing jointly. As a result, wealthier taxpayers will likely continue claiming their itemized deductions while middle-class families will have to elect standard deductions. For households that are consistently well over the standard deductions amount, not much will change. For middle-class families, however, around two-thirds will no longer itemize their deductions—a drop from 17 percent to 5.5 percent. If a taxpayer has itemized deductions in the past but can no longer do so under the TCJA, they will no longer collect tax benefits for their donations.
For high-income earners and individuals who want to begin giving more under the new tax reform, the Tax Cuts and Jobs Act does offer two benefits. Now, taxpayers can take a deduction for 60 percent of their adjusted gross income (AGI), compared to the 50 percent limit preceding the new tax law. Additionally, there is now no limit to the total charitable deductions you can claim.
This information, of course, does not imply that individuals only give to nonprofits for the tax incentives—that could not be farther from the truth. Millions of taxpayers will still continue to financially support charities across the globe; the TCJA will impact whether or not taxpayers will itemize their contributions.
Appraisal Economics has been providing charitable donation valuation services to donors and recipients for over 30 years. These charitable valuations include assets such as: intellectual property, real estate, and equipment, among others.
One of the fastest growing, yet least understood, areas of the tech sector is artificial intelligence (AI). AI includes the development of computer systems that perform tasks which, up until recently, required human intelligence. This might include jobs dependent on speech recognition, visual perception, and/or decision-making, and AI is currently being put to use in a wide range of innovations, from driverless cars to Alexa to cancer detection technologies. AI makes it possible for machines to learn from experience, a task that they can master faster and with more accuracy than humans. But with so many companies now using AI, and so many business leaders and valuation experts uncertain of AI’s worth, an unprecedented number of tech companies are left uncertain of the actual value of their companies.
There has been no shortage of investment in AI startups, and tech giants like Google, Twitter, Salesforce, Apple, and others, have been aggressively acquiring AI startups for the past five years or more. Meanwhile, Forrester Research predicts that Cognitive Computing Technologies will be worth $1.2 trillion by 2020, with AI investments tripling by that time. And Accenture predicts that the market will be worth $8.3 trillion in the US alone by 2035. That is a lot of money exchanging hands.
And yet, we are still debating how to value AI in the first place. The challenge lies in determining whether valuation methodologies should follow a strategic approach or an operational one. AI can certainly be considered proprietary technology, but in instances where the “vision” of the company (the way in which the intellectual property, or IP, is being put to use) plays into the valuation, these opposing views must be negotiated.
Founders in the AI space push for their companies to be valued from a strategic point of view, placing the emphasis of the valuation on the revolutionary idea and corporate vision that has made the company a success. Meanwhile, more traditional operational valuations tend to favor investors and acquiring companies, basing appraisals on more standard sales and profit growth formulas. While this is a fine methodology in many instances, in today’s technology age, it does not really work to ignore the value of a cutting-edge AI application or profound corporate vision. This is especially true for start-ups. For established companies, it is much easier to look at their historical financials and use those as a basis for cash flow forecasts. Start-ups, however, don’t have the benefit of historical data. Valuations must rely more heavily on future potential.
Unfortunately, there is no single correct way to value AI. The fact of the matter is that it depends on the inputs and assumptions that are unique to the company in question. Still, audit firms will demand an approach that is documentable and replicable. That is why it makes sense to engage a third-party expert like Appraisal Economics to value your AI company, so that the problem can be approached in a logical, methodical way that is defensible. Valuing technology companies is a challenging undertaking that requires much more than a simple formula. An appraisal expert must use judgement to assess both strategic vision and operational value.
Deregulation has made the electric supply industry more competitive in a number of states. While not every state is deregulated, Congress and the Federal Energy Regulatory Commission (FERC) have paved the way for a more open marketplace and an increase in competition among electricity producers.
The changes allowed each segment within the industry to be priced separately, preventing plant and transmission owners from offering preferential treatment to their own plants. This caused many public utility companies to divest their plants into separate, unregulated companies, while retaining their transmission and distribution activities. It also resulted in a greater focus on competition and income, while making it more difficult for power producing plants to generate profits. Now, power generating facilities are seeking power plant valuations to determine the fair market value of their property within a changing industry.
Several approaches are used for power plant valuations—most notably the cost approach, income approach, and the comparable sales approach—and the method best suited for a generator depends on whether their market is regulated or deregulated, although deregulation has impacted how all of these valuations are conducted.
The income approach assumes that the property is worth the value of the income stream it generates, and deregulation has shifted this technique to be based on a projection of what a facility will earn based on future market prices. The cost approach assumes that an investor will only pay what it would cost to build a substitute plant with equivalent assets, taking depreciation into consideration. In a regulated market, power plant developers are guaranteed a low-risk return that matches their cost to build. Deregulation means that returns are no longer guaranteed and bankruptcy is possible, but it also makes higher returns a possibility, thus altering the way the cost approach is handled. A comparable sales approach examines the market sales prices of comparable power generating facilities.
Deregulated markets have created active demand for power plants sold separately from transmission and distribution assets, meaning that a wealth of market data is available to accommodate sales comparisons. Deregulation and increased competition has brought about changes in all three of these methodologies, making it crucial for companies to reassess their current worth.
Whether you’re dealing with solar, wind, coal, waste to energy, or other types of power generation facilities, a valuation should include generation and transmission equipment, land, buildings, intangible assets, and any other assets tied to such operations. A more deregulated industry has made appraisals both more important to obtain, as well as more difficult to execute.
Working with an industry expert such as Appraisal Economics provides you with information that withstands the scrutiny of financial institutions, government agencies, and the courts. Whether you need to buy or sell assets, improve your accounting and property tax filings, file an insurance claim, or strengthen your strategic plan, an accurate and defensible power plant appraisal is an invaluable resource.
Intellectual property laws are complex, and these intricacies often lead to confusion for individuals and businesses. It behooves companies to understand intellectual property (IP) laws so they can properly protect their own IP, and understand their rights when it comes to using or referencing the IP of others.
Do not confuse copyrights and trademarks
Trademarks are used to differentiate a company’s products or services. Trademarks might protect a logo, name, phrase, design, or other branding element. A copyright is legal protection for an original work. Such an authored work may include an artistic product such as a song, a photograph, or a novel. It could also include computer software or architecture. It does not include ideas or methods of operation. Copyright holders can pursue claims at their discretion, and many owners choose not to enforce copyrights since this choice does not weaken the copyright itself (think about fan fiction or tribute bands). However, if someone else attempts to claim ownership over the copyright, it is imperative to have the copyright established so that such false claims can be corrected. Conversely, trademark owners must enforce their trademarks or risk losing them completely and diluting the value of a product or service.
Businesses do not automatically own IP
Businesses often falsely believe that they automatically own the IP created by any employee or contractor they hire. Unless a company’s contract explicitly states that it owns full rights to these developments, it may instead find that it has limited or no rights at all to such works. Corporations should undertake a thorough contract review immediately to guarantee full rights to the intellectual property it’s developing.
Protect your IP globally
Patents, which are sought to protect unique inventions, are one example of a safeguard that does not automatically equate to worldwide protection. Obtaining a patent from the US Patent Office only protects that patent within the United States. If a company is conducting business abroad, it should file for patents in each country in which it plans to operate. Additionally, laws vary around the world, so a company must comply with each individual country’s unique laws.
Today, IP and intangible assets comprise the lion’s share of a company’s value and promise. Therefore, it is never been more crucial to establish an intellectual property strategy, and enforce it to the fullest. In a competitive marketplace, these protections can hold a business’s future in the balance. In the US, we operate on a “first to file” system rather than a “first to invent,” meaning that protection is given to those who seek it quickly. In the current business climate, there is little room for error on this, and a smart and effective strategy should be top of mind for every business leader.
Misconceptions about IP law are everywhere and too abundant to cover comprehensively in a blog post. Engage a trusted IP consultant to help educate your business on the many intricacies of the law and dispel the myths that have crippled scores of great companies. Defending a business’s IP carves out its competitive edge, enables sustainable growth, boosts profitability, and drives higher valuations for the company. A sound strategy makes for a sound future.
Filing a 83(b) election tax form is beneficial for taxpayers that expect the value of certain stocks and securities to increase. If this step is taken and performed properly, employees and startup founders can pay taxes on the total fair market value of restricted stock at the time of granting. Electing to pay taxes when securities are granted, as opposed to when they vest, negates the need to pay taxes on “phantom income” each year. Phantom income can be triggered when the value of a company increases, not simply by exercising options or selling stock. Therefore, if, for example, you own stock in a startup that grows considerably, failing to file a 83(b) election could cost you major money. And if the securities are illiquid, you may owe taxes that are difficult to cover.
An 83(b) ensures that when the shares are ultimately sold, more of the gain is taxed at lower rates, increasing your after-tax proceeds. Usually, in the event that the securities appreciate, an 83(b) election results in lower taxes paid out overall. But compliance with 83(b) requires taxpayers to assess the fair market value at the time of the grant. This value drives what taxes are assessed.
The best place for taxpayers to begin is to seek an appraisal of the fair market value of their common and restricted stocks, options, and other investment securities. This will determine whether or not an 83(b) election is beneficial. If it is, the appraisal can support their 83(b) filing. It is important to note that an 83(b) election must be made within 30 days of the date the securities are granted. This prevents taxpayers from waiting until the appreciation has already occurred before electing the tax benefit.
If the stock value decreases, an 83(b) election cannot be reversed. Choosing such a tax strategy when the value of a company consistently declines means that taxpayers would have overpaid in taxes by choosing to prepay on a higher equity valuation. Another scenario where an 83(b) election would be a disadvantage is if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that were never received.
In essence, the cost of failing to file a 83(b) when stocks increase in value can be devastating. Likewise, choosing to file when stock values decrease can also prove detrimental. That is why an appraisal is so important. Independent valuations help taxpayers make the best, most informed decision possible, and ensure that the IRS has the supporting evidence necessary to honor 83(b) elections when applicable. Appraisals help taxpayers weigh the risks and rewards of 83(b), eliminating faulty assumptions and blind spots from the equation.
Nothing ushers in the holiday season quite like holiday music, and it is especially exciting to hear each year’s remakes. A song like The Little Drummer Boy, for example, was originally written in 1941 by Katherine Kennicott Davis and first recorded in 1951 by the Trapp Family Singers. Since that time, there have been over 220 versions recorded in seven different languages. A handful of the artists that have recorded their own versions of the song include Johnny Cash, Joan Baez, Diana Ross, The Jackson 5, Ray Charles, and even Alicia Keys.
Think also of the other classics, like Rudolph the Red-Nosed Reindeer and Frosty the Snowman. This is precisely why copyright valuations are so important—and it was our firm that had the opportunity to value these three familiar melodies. Without a copyright valuation, the creators of these classics would have missed out on a staggering opportunity.
Copyrights protect intellectual property (IP) that might include original literary, musical, dramatic, or other artistic works. Copyright protection grants exclusive ownership rights, safeguarding the work and ensuring that if someone wants to reproduce, perform, or use a work in any form, the copyright owners are able to approve or deny such requests and, in the event that access to the work is granted, copyright owners are paid appropriately. This is known as a royalty, and whether it is in the event of a holiday song remake or a film adaptation of a novel, these can prove very lucrative for the original artist. Likewise, copyright infringement is punishable by law and therefore protects the artist against theft or unapproved uses of their work.
Copyrighting relies on an appraisal process to ensure accurate and fair copyright valuations. By taking into account historical and projected financial data, as well as market-based information on sales, licensing transactions, royalty rates, and other data for comparable copyrights and underlying assets, artists can ensure that they are paid fairly for their work. A copyright valuation uses projected cash flows and valuation models to determine the fair market value of the copyrights, ensuring that the appraisal is defensible and that copyright owners have all the necessary information on hand should the need to sue for damages arise.
Songs generate income each time they are played on the radio, streamed on a device, or used in a commercial, TV show, or movie. They also generate income every time they are covered by other artists. An iconic song can generate impressive revenue streams for decades to come, well beyond the life of the author. It pays to ensure your intellectual property is adequately protected by seeking a copyright valuation.
Property tax assessments are not written in stone. This is good news for businesses that face escalated property taxes. Business owners can and should fight unreasonable increases, but not before arming themselves with an equipment appraisal. Equipment appraisals serve as documented proof of what your equipment is actually worth, and ensure that should you appeal a property tax assessment, you have the ammunition to win.
Tax assessors are far from infallible. They are expected to value a wide range of entities, from land to vehicles, properties, tools, industrial equipment, and more. Because they are operating across such a broad range of valuations, they are especially susceptible to errors. In fact, the National Taxpayers Union estimates that between 30-60 percent of all property is over-assessed, making it paramount for you to review assessments carefully and verify supporting figures. It is also worth noting that assessors often face pressure to raise taxes, thereby increasing the availability of government funds that enable their own work. In short: viewing your property tax bill with a healthy skepticism can serve you well.
That being said, solicit input from an independent, certified equipment appraiser prior to your property tax appeal. Assessors view data compiled by outside consultants as more trustworthy than that which is provided by business management or equipment dealerships, both of which have a stake in the valuations. Third party appraisals are unbiased and defensible. Appraisers work with similar equipment on a regular basis and are trained in methodologies that hold up to scrutiny. Additionally, independent appraisers are able to take specific factors into account, such as the equipment condition, utility, remaining useful life, and can also adjust those factors by considering market conditions, economic fluctuations, and industry trends.
The valuation analysis in an equipment appraisal needs to tell a concise and compelling story. That narrative often includes what information was collected, how that process was executed, sources for market data, industry history, and industry forecasts, as well as how and why the calculations were performed. Supporting documentation can be extensive, but a trained professional will know exactly how to present the necessary information.
While many tax assessors base their calculations on estimations and opinions, the burden of proof is not on them. It is on you. And until those valuations are countered with solid documentation stating the contrary, you are stuck with the bill.
A comprehensive and well-researched equipment appraisal allows you to fight fire with facts. Appraisal reports prepared by independent, certified professionals stand up to the highest level of scrutiny and ensure that you pay only what you owe.
In recent years, the IRS has increased its auditing activity. This trend will persist as the government continues to target families it believes are abusing the use of discounts. One of the most beneficial ways to curb wealth transfer taxes is to establish a family limited partnership (FLP). However, structuring and managing a FLP is a complex undertaking, and individuals who wish to transfer wealth to younger family members risk making critical mistakes that could result in audits, penalties, and higher taxes. Consulting with certified appraisers prior to gifting allows you to decrease the cost of wealth transfer without inadvertently triggering red flags.
Transfer taxes can be staggering. There are estate and gift taxes, as well as a generation-skipping transfer tax imposed on gifts to grandchildren and others. A FLP is often used in concert with a comprehensive strategy for gifting non-controlling interests, to minimize these setbacks. A FLP is an estate planning strategy that allows you (as the general partner) to give your assets away to your heirs. The heirs don’t own the assets outright, making them less valuable from a tax perspective. The FLP may contain real estate, a family business, or securities. You retain a small interest as general partner, and the remainder of the assets are transferred, all at once or incrementally, as limited partnership interests to heirs.
FLPs are beneficial because creditors cannot easily penetrate the partnership to seize assets, and, from an estate tax perspective, general partners reduce the value of included assets. For people with sizeable estates, significant private business interests, or real estate that they do not plan to sell, FLPs have become a popular estate planning tactic, more so than conventional trusts, which force donors to forego ownership of their assets. But FLPs are complex and require expert assistance to avoid undo IRS scrutiny. The first, and most crucial, step is to obtain valuations of the underlying assets.
In order for assets to be appropriately discounted through the use of a FLP, their fair market value must first be determined. That’s why it is crucial to engage a valuation professional at the outset of the process. Once those numbers are established, a discount analysis is performed to assess the value of the interests being transferred. Since limited partners exercise no control over partnership assets and the marketability of the assets is limited, the value of the partnership interests is discounted for tax purposes. If, however, a valuation expert is not involved early, a FLP is more likely to be audited, at which time an expert will need to be hired anyway, and the involvement of the IRS will cause the valuation expert’s role to become much more extensive (and costly) than would have been necessary originally. Not to mention potential fines and unforeseen adjustments to your tax liability.
The complexity of managing FLPs goes beyond valuation. The partnership must also follow a number of annual record-keeping regulations, and take steps to avoid classification as an investment company, in which case appreciated assets would be subject to increased income taxes. However, most partnerships can sidestep these difficulties through thoughtful planning and consultation with knowledgeable tax and legal advisors.
FLPs can provide significant transfer tax savings, allow the donor to retain control over the assets, and also enable them to gift a greater amount of partnership interests to a younger generation. If you’re considering a FLP as part of your gifting strategy, be sure to keep the IRS at bay by properly valuing your assets. A reliable and comprehensive valuation is the cornerstone to all successful FLPs.