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Business Valuation & Litigation Support Trends Volume 5 Issue 2 April 2010 What is Book Do Your Homework Before Choosing a Value? Valuator: IRS Revenue Ruling 59-60 Offers The term book value is used in business quite frequently, but Some Textbook Clues many people lack a clear Choosing a competent valuator should growth. These factors are the understanding of exactly what book value is and what it be straightforward, right? Of course you fundamental components of any check his or her credentials, experience company’s value. represents. Book value is the and references. But there is another step difference between assets (what 2. External business factors. Outside is owned) and liabilities (what is you can take: Get to know a little bit elements – such as your company’s about IRS Revenue Ruling 59-60 (RR owed). It appears on a 59-60). opportunities and threats, company’s balance sheet under competitors, and the relative ease of shareholder’s equity or a similar This ruling has been around for more entering and exiting your industry – than 50 years and is a commonly used must also weigh into a valuator’s section. guide for valuing closely held assessment. Book value has many uses: businesses. All qualified valuation analysts will have a thorough knowledge 3. Balance sheet condition. A valuator In agreements to determine should review at least two years’ the amount of a shareholder’s of the ruling. By becoming familiar with balance sheets to adjust book values buy-in or buy-out it yourself, you’ll have the upper hand when evaluating a potential valuator. from their historical amounts to By investors or lenders reflect current fair market values. RR 59-60 is probably best known for its As part of the analysis of 4. Earnings ability. A prime factor in whether a company has a definition of fair market value. In fact, determining your company’s value is experts often cite it in court cases and positive or negative worth other valuation matters. So, in addition its ability to generate future income. And because past earnings can be the In determining the financial to the fair market value definition, best indicators of future performance, health of a company review these eight value elements: RR 59-60 recommends analyzing at Note that book value is not the 1. Internal business factors. Under RR least five years’ income statements. same as a company’s market 59-60, valuators must learn the 5. Dividend-paying ability. Your intimate details of your company, company’s capacity to pay its Continued on page 2... such as your product and service offerings, strengths and weaknesses, shareholders dividends provides a valuator insight into what investors relative stability, and might pay for your company’s stock. projected Business Valuation & Litigation Support Tis published 6. Goodwill and other intangibles. four times a year and is available to clients and friends of Goodwill is the difference between a Schenck at no charge. For name and address corrections, or to receive company’s fair market value and its the newsletter electronically, please call Dawn Krueger at 920-996- net tangible value, and is a function 1465, or email firstname.lastname@example.org. of the company’s earning capacity. All dates for events are subject to change; please call or visit us online schencksc.com 800-236-2246 for confirmation. Business Valuation & Litigation Support Trends April 2010 Page 2 What is Book Value? Continued from page 1... value. It is not what the company would be sold for. It is assets are generally not included in book value, and liabilities simply an amount that results from subtracting accounting are generally recorded at face value. The longer a company has assets from accounting liabilities as shown on the balance held its assets, the less likely it is that the book value will bear sheet. a strong resemblance to its economic value. Depending on the accounting method used by the Book value will be closest to market value for a company company in question, the book value shown may not be whose total assets are largely current and tangible or for a an accurate representation of true book value. For company with a large number of fixed assets that have recently instance, the book value for a company that reports on the been acquired. For other companies, book value serves as a cash basis will not include accounts receivable or accounts good starting point for determining other types of value, payable. Similarly, an election to value inventory on the including fair market value. It is information that most last-in, first-out method as opposed to the first-in, first-out companies have readily available, which can then be adjusted method will artificially reduce book value. Intangible appropriately to determine the company’s economic value. Do Your Homework Before Choosing a Valuator Continued from page 1... 7. Past company stock sales. A company’s previous Does Your Valuator Pass the Test? stock sales act as a benchmark to its value – but only if Once you have a general overview of RR 59-60, you’ll be the sales are at arm’s length, are reasonably near the better able to grade your valuator. And that’s important, valuation date and involve interests similar in size to because choosing a qualified valuation analyst is an essential the business interest being valued. first step toward an accurate business valuation. Please give us 8. Competitors’ sales prices. Finally, examining a call if you would like to learn more. comparable companies’ prices are in part a logical basis for determining your company’s value. Your Business Valuation Team Fox Cities 800-236-2246 Fond du Lac 800-236-2245 Mark A. Hanson, CPA, CVA, ABV Ronald E. Brien, CPA, CVA Nancy J. Streck, CPA, CFP®,,CVA Steven F. Predayna, CPA, CVA Manitowoc 800-550-0558 An Important Message Robert A. De Bruin, CPA, CVA Stephen P. Shellman, CPA, CVA While every effort has been made to provide valuable, useful Milwaukee 888-556-5580 information in this publication, Schenck and any related suppliers or Green Bay 800-676-0829 Karin M. Gale, CPA, CM&AA Kenneth J. Lardinois, CPA, CVA associated companies accept no responsibility or any form of liability Daniel J. Young, CPA, CVA Sheboygan 800-236-2248 from reliance upon or use of its contents. Any suggestions should be LeRoy W. Matuszak, CPA, CFP®, CTodd A. Mueller, CPA, ABV, CBA considered carefully within your own particular circumstances, as they Chris J. Hendricks, CPA, CVA Donna J. Schultz, CFP®,AVA are intended as general information only. Schenck provides a full range of services including accounting, tax, payroll, information technology, business consulting, reti rement planning, investment and human resource solutions for today’s business, government and personal challenges.To learn more about our full line of sol utions and how we can help, visit us online at schencksc.com, or call 800-236-2246. Appleton Fond du LacGreen Bay Manitowoc Milwaukee Oshkosh Sheboygan Stevens Point © SchencS2010