Returning Value Blog

Are you thinking about merging with or acquiring a business? CPA-prepared financial statements can provide valuable insight into historical financial results. But an independent quality of earnings (QOE) report can be another valuable tool in the due diligence process. It looks beyond the quantitative information provided by the seller’s financial statements.

It’s almost time for calendar-year businesses to prepare their year-end financial statements. If used correctly, these reports can be a valuable management tool. Use them in benchmarking and forecasting to be proactive, not reactive, to market changes.

Goodwill shows up on a company’s balance sheet when the company has been acquired in a business combination. It represents what’s left over after the purchase price in a merger or acquisition is allocated to the company’s tangible assets, identifiable intangible assets and liabilities. Periodically, companies must test goodwill for “impairment” — that is, whether the carrying value on the balance sheet has fallen below its fair value. This assessment can be complicated.

CPAs typically report historical financial performance. But sometimes they’re hired to predict how a company will perform in the future.

2018 is expected to be a hot year for mergers and acquisitions. But accounting for these transactions under U.S. Generally Accepted Accounting Principles (GAAP) can be complicated, especially if the deal involves intangible assets. Fortunately, the Financial Accounting Standards Board (FASB) offers a reporting alternative for private companies that simplifies accounting for new business combinations, avoiding a lot of red tape.

With an employee stock ownership plan (ESOP), employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some potential tax breaks, an extra-motivated workforce and potentially a smoother path for succession planning.

Say you currently have a direct ownership interest in a privately held company. Or, perhaps your company granted you stock options, stock appreciation rights, or some other type of stock-based compensation. Whatever the circumstances may be, you may consider yourself fortunate; but do you really know what your business interest is worth?

The required rate of return is just one of many components used in the calculations used in corporate finance and equity valuation. It goes beyond identifying the return of the investment, and factors in risk as one of the essential considerations in determining potential return. 

Understanding How Present Value Works in the Context of Business Valuation

Consider the following scenario: You and a friend are taking in a ballgame one lovely evening at the old ballpark. All is well until that friend of yours mentions that he forgot his wallet. Said friend, then sheepishly asks if he can borrow $50 to fund his consumption of requisite ballpark goodies—a hot dog, a frosty beer, peanuts (what would a ballgame be without peanuts?) and ice cream.

How to value business interests

It is often difficult to put a price tag on a company that is not publicly traded. For instance, the value of a family-owned business will typically exceed the total value of the hard assets such as equipment and inventory. In addition, assigning a value to intangible assets such as goodwill is a difficult proposition at best.