Tag: business

What is Risk? How Does it Affect Business Value?

Posted by Gerald A. Shanker on May 10, 2016

risk and business value — What are the risks in your business, and what can you do to reduce them?

According to Dictionary.com, risk is defined as “the chance of injury or loss; a hazard or a dangerous chance.” In the business valuation context, risk refers to the possibility of financial loss or drop in asset value.

In layman’s terms, the risk in buying a business is that you will overpay for it. The more risk that is associated with an investment, the higher the return that is demanded by the investor. The higher expected returns are achieved when the market places a lower value on a business that is perceived as having higher risk.

In estimating the value of a business, the analysis is based on expected cash flows and the risk that such cash flows will not be received as expected. An astute buyer seeks to minimize risk, through careful evaluation and understanding of the business he or she is considering buying or investing in. As I have said in previous blogs, the evaluation of a closely held business is no different than the evaluation done in purchasing 100 shares of a public company:

Will the company continue to pay dividends?
How much will those dividends be?
What will the shares be worth when you are ready to sell them?

Certain risks, such as the economy in which the business operates, are uncontrollable. Some risks, such as future competition, may be anticipated but others, such as technological obsolescence may come as a complete surprise. Many years ago, a client purchased a chain of successful photographic film developing labs and continued to operate them successfully until the advent of digital photography. The client certainly did his homework, but did not see the change that was coming. Neither did Kodak and look what happened to them!

Controllable risks to consider

If you are buying or selling a business, what are some of the controllable risks that you should look out for? Here are a few of the more common ones:

Poor accounting records – A company’s accounting records should tell the full financial story of the business. With all the low-cost accounting software that is available, there is no reason that every business should not have great accounting records. A company’s books should speak for themselves; the more stories, explanations, and exceptions, the greater the perceived risk.
Customer concentration – Is the continued success of the business dependent upon a single customer or a few customers? If the loss of any of these customers would negatively impact the business, that is a significant risk.
Supplier concentration – Is the business dependent on any suppliers that cannot be quickly and easily replaced? This could be a problem if anything happens to one of those suppliers.
Key employees – Is the business dependent on the services of one or more employees? Are there enforceable employment contracts and non-compete agreements in place with them? If the business does not have these agreements (signed by all parties and on file), what would happen if those employees went to work for your competitor?
Foreign competition – Can the product or service offered by the business be purchased at a lower cost from a foreign provider? Everything from tax preparation to manufacturing to technology consulting can be outsourced overseas these days. If this hasn’t affected your business yet, chances are it soon will. What are you doing to remain competitive?

Taking these factors into account, what are the risks in your business, and what can you do to reduce them?

Everything you do to reduce business risk will be a step toward increasing your company’s value. If you’d like a fresh look at the risks inherent in your business, or to discuss the business valuation of your company, contact me at 201.655.7411 or GShanker@krscpas.com.

Are You Starting a Business? This Handy Checklist Will Help You Get off to the Right Start.

Posted by Maria T. Rollins on April 29, 2016

free business startup checklist — Get a free checklist that will walk you through the key steps to starting a business.

Starting your own business is an exciting endeavor but one filled with so many questions. Selecting a name and a location, picking out office furniture, and figuring out what equipment you’ll need are just the tip of the business iceberg.

Getting started on the right track with all the necessary financial details can have even the savviest of new business owners quickly drowning in paperwork and decisions.

Some issues you need to grapple with as you begin your business venture include:

Should your company be registered as a partnership, and S-Corp or an LLC? Are you going into business as a sole proprietor?

How will you track your daily expenses and financial transactions? Then there’s also:
- Who will do this in your new company? With so much happening with a startup, are you better served outsourcing your bookkeeping to an experienced accounting firm?
- Which expenses are mandatory to track in order to develop accurate financial forecasts, budgets, and cash flow reports?

Should your company’s accounting be on a cash or accrual basis?
What are your new venture’s tax responsibilities?

There is lots of information for business owners available from the IRS and the Small Business Administration. But for easily accessible info that takes you through all the critical accounting pieces of starting up a company, you can download our free business startup checklist at http://krscpas.com/go/business-startup-checklist/. With years of experience working with business owners in New Jersey and New York, we can help get you on the right track—and stay there!

Once you’ve downloaded the checklist and had a chance to look it over, give us a call to discuss your startup’s needs at 201.655.7411 or email MRollins@KRScpas.com for a no-obligation initial consultation.

How to Increase the Value of Your Business

Posted by Gerald A. Shanker on April 26, 2016

The value of a business is based on two factors: the expected future cash flow of the business and the risk that future cash flow will occur when and in the amounts expected.

Cash flow and risk are the meat and potatoes of business valuation. The valuation report that is produced is just a detailed analysis of these factors. Continue reading “How to Increase the Value of Your Business” →

Getting a New Jersey Divorce? Beware of Spousal Double Dipping

Posted by Gerald A. Shanker on April 20, 2016

Getting a NJ divorce? Beware of double dipping — New Jersey courts allow double dipping: the nontitled spouse receives their share of business value, which is based on future income, and on top of that, receives a portion of that very same income as it is earned.

In a divorce case in which one spouse owns a business, the business is generally subject to equitable distribution; that is, each spouse receives their equitable share of the value of the business. Practically speaking, this does not mean that the business is sold and the proceeds divided but rather, that the nontitled spouse receives money or other property equal to their equitable share of the business value. The problem arises in the conflict between the income stream used to value the business and the income stream used to calculate spousal support.

Continue reading “Getting a New Jersey Divorce? Beware of Spousal Double Dipping” →

Does Your Small Business Need Help with Bookkeeping Tasks?

Posted by Maria T. Rollins on April 8, 2016

Outsourced bookkeeping — Outsourcing your bookkeeping and back office tasks can free you up to focus on your business

Small-business owners bring expertise and commitment to their companies, but many find they are often too busy running their operations and taking care of their customers to deal with paperwork. We all know how quickly those stacks can pile up, and unfortunately, it’s all too easy to lose track of bills that must be paid. And what about reconciling the corporate checkbook on a timely basis?

Continue reading “Does Your Small Business Need Help with Bookkeeping Tasks?” →

Goodwill and Your Business

Posted by Gerald A. Shanker on February 19, 2016

What is goodwill? How is it measured? Why is it important? Goodwill is often misunderstood by owners of closely-held businesses.

An Intangible Asset

According to the American Institute of Certified Public Accountants’ Statement on Standards for Valuation Services, goodwill is “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.”

Goodwill includes intangible assets such as customer relationships, trade secrets, reputation and brand.

The Internal Revenue Service defines it as “The value of a trade or business attributable to the expectancy of continued customer patronage. This expectancy may be due to the name or reputation of a trade or business or any other factor, and in the final analysis, goodwill is based upon earning capacity. The presence of goodwill and its value, therefore, rests upon the excess of net earnings over and above a fair return on the net tangible assets.”

What does this mean in English? Goodwill is the value of a business, over and above the value of its identifiable tangible assets. It is the expectancy of future earnings. As a simple example, assume a distribution business’s only asset is inventory with a value of $100, but someone is willing to purchase that business for $500. The $400 paid over and above the value of the inventory is payment for goodwill.

The Value of Goodwill

Why would someone pay more for a business than the value of the tangible assets? Because they expect to use those assets to earn a profit. In the distribution business or any business, goodwill may include customer relationships, supplier relationships, reputation, location, trade secrets, or any other factor that causes the business to earn income above and beyond a fair return on tangible assets.

How can you create or increase the value of goodwill in your business?

By earning consistent (and hopefully increasing) net income, which is supported by good accounting records.
By establishing consistent and well-documented procedures, which will hopefully support continued future profitability. After all, someone who buys a business is not doing so because of what happened last year, he or she is buying it with the expectation of what will happen next year.

Who Owns Goodwill?

If goodwill is based on customer relationships, is the goodwill owned by the business or the employees who maintain the relationships? This is an area of controversy because it has significant tax ramifications in the sale of some businesses, but the courts have generally held that goodwill is owned by the employee unless he or she has executed a restrictive covenant or employment agreement with the company. If no such agreement exists, and the employee is free to work for a competitor and bring the relationship there, then the company does not own the goodwill. However, if you are considering selling your business and do not have restricted covenants or employment agreements, consider very carefully whether or not they are necessary.