Slippery Rock
Gazette
February 17
By Lance Wallach
Industry Consultant
Most business owners want to: build wealth and maximize the value of what is left behind for heirs; protect their wealth to insure that what they have spent a lifetime building isn’t eaten away by taxes, inflation and/or the cost of medical care; distribute their wealth so that their loved ones may be taken care of, and see to it that their assets and possessions go where they want them to go in the time frame they want this to happen. This is the essence of estate planning.
Eventually the business owner leaves the business. If a family member or employee can buy the established business, planning needs to be done years in advance for the best possible results.
If an outside buyer is desired, the company should be positioned so that, if a favorable opportunity arises or an unfortunate event occurs, the company is completely ready for transition. In other words, the business should be ready for sale versus up for sale.
Determining the value of a business is an art. There are no fixed rules, just general guidelines. All characteristics of the business must be considered. The value, however, is ultimately what a buyer will pay considering all relevant circumstances and bargaining at arms length. This is referred to as the fair market value.
Non-cash Payment
Today’s would-be sellers are seeing attractive purchase prices offered in currencies other than cash. The purchase might be part cash, and the remainder an unsecured promissory note. But cash is the only sure thing.
Should the business falter, the remainder of the purchase price may evaporate or become subject to litigation. A sale to the highest bidder is not always the most appropriate sale.
Make plans for the future
Most small business owners are so busy running the company they fail to plan for the eventual transfer of the business. By not planning, they jeopardize the futures of the business and, possibly, of his or her family. We are often consulted at this time, but, at this point, it is almost too late to help.
Succession and estate planning involves various questions of tax, law and business planning. The business owner(s) should make the final decisions after being provided with various types of information. If planning is done early, the process is not difficult and the results are maximized. No one plans to fail, but many fail to plan.
How to use a captive insurer to save money
Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up insurance companies to provide coverage when they think outside insurers are charging too much or coverage is simply unavailable. A small company can also use this as a tax reduction strategy, with the ability to get money back tax free.
Often, they are starting what is called “a captive insurance company”— an insurer founded to write coverage for the company, companies, or people who founded it.
Here’s how a captive insurer usually works. The parent business creates a captive so that it has a self-funded option for buying insurance, whereby the parent business provides the reserves to back the policies. The company then either retains that risk or pays reinsurers to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive.
A captive insurance company would be an insurance subsidiary that is owned by its parent(s).
The better way for large tax deductions
There are a number of significant advantages that my be obtained through sharing a large captive (“Group Captive”) with other companies. The most important is that you can significantly decrease the cost of insurance for your insureds, as compared to a stand alone captive, through this arrangement. The second advantage is that Group Captives do not require any capital commitment.
By sharing a large captive you only pay a pro rata fee to cover all General and Administrative expenses of the insurance company. The cost for administration is very low per insured as compared to forming and operating a traditional stand alone captive insurance company. By renting a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires no significant financial commitment beyond the payment of premiums.
Operation of a stand alone captive insurance company may not achieve similar cost saving results that a small business could obtain through sharing a large captive. More importantly, group captives require little or no maintenance by the insureds, and can be implemented in a fraction of the time as compared to stand-alone captives.
If you do this correctly, you can reduce insurance costs and obtain a large tax deduction, with the ability to get money back tax free.
__________________
Lance Wallach speaks and writes extensively about retirement plans, estate planning, and tax reduction strategies. He speaks at more than 70 conventions annually, writes for 50 publications and was the National Society of Accountants Speaker of the Year. For more information and additional articles on these subjects, call (516)938-5007 or email lawallach@aol.com...
The information provided herein is not intended as legal, accounting, financial, or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Showing posts with label Lance Wallach Expert Witness. Show all posts
Showing posts with label Lance Wallach Expert Witness. Show all posts
Section 79, captive insurance, 412i, 419, audits, problems and lawsuits
Section 79,
captive insurance, 412i, 419, audits, problems and lawsuits
April 24, 2012 By Lance Wallach, CLU, CHFC
Captive insurance, section 79, 419 and 412i problems
The dangers of being "listed"
A warning for 419, 412i, Sec.79 and captive insurance
Accounting Today: October 25,
By: Lance Wallach
Taxpayers who previously adopted 419, 412i, captive insurance or Section 79
plans are in
big trouble.
In recent years, the IRS has identified many of these arrangements as abusive
devices to
funnel tax deductible dollars to shareholders and classified these arrangements
as "listed
transactions."
These plans were sold by insurance agents, financial planners, accountants and
attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a
"listed
transaction" must report such transaction to the IRS on Form 8886 every
year that they
"participate" in the transaction, and you do not necessarily have to
make a contribution or
claim a tax deduction to participate. Section 6707A of the Code imposes severe
penalties
($200,000 for a business and $100,000 for an individual) for failure to file
Form 8886 with
respect to a listed transaction.
But you are also in trouble if you file incorrectly.
I have received numerous phone calls from business owners who filed and still
got fined. Not
only do you have to file Form 8886, but it has to be prepared correctly. I only
know of two
people in the United States who have filed these forms properly for clients.
They tell me that
was after hundreds of hours of research and over fifty phones calls to various
IRS
personnel.
The filing instructions for Form 8886 presume a timely filing. Most people file
late and follow
the directions for currently preparing the forms. Then the IRS fines the
business owner. The
tax court does not have jurisdiction to abate or lower such penalties imposed
by the IRS.
Many business owners adopted 412i, 419, captive insurance and Section 79 plans
based
upon representations provided by insurance professionals that the plans were
legitimate
plans and were not informed that they were engaging in a listed transaction.
Upon audit, these taxpayers were shocked when the IRS asserted penalties under
Section
6707A of the Code in the hundreds of thousands of dollars. Numerous complaints
from
these taxpayers caused Congress to impose a moratorium on assessment of Section
6707A
penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately
started sending
out notices proposing the imposition of Section 6707A penalties along with
requests for
lengthy extensions of the Statute of Limitations for the purpose of assessing
tax. Many of
these taxpayers stopped taking deductions for contributions to these plans
years ago, and
are confused and upset by the IRS's inquiry, especially when the taxpayer had
previously
reached a monetary settlement with the IRS regarding its deductions. Logic and
common
sense dictate that a penalty should not apply if the taxpayer no longer
benefits from the
arrangement.
Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in
a listed
transaction if the taxpayer's tax return reflects tax consequences or a tax
strategy described
in the published guidance identifying the transaction as a listed transaction
or a transaction
that is the same or substantially similar to a listed transaction. Clearly, the
primary benefit in
the participation of these plans is the large tax deduction generated by such
participation. It
follows that taxpayers who no longer enjoy the benefit of those large
deductions are no
longer "participating ' in the listed transaction. But that is not the end
of the story.
Many taxpayers who are no longer taking current tax deductions for these plans
continue to
enjoy the benefit of previous tax deductions by continuing the deferral of
income from
contributions and deductions taken in prior years. While the regulations do not
expand on
what constitutes "reflecting the tax consequences of the strategy",
it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within
the contemplation
of a "tax consequence" of the plan strategy. Also, many taxpayers who
no longer make
contributions or claim tax deductions continue to pay administrative fees.
Sometimes,
money is taken from the plan to pay premiums to keep life insurance policies in
force. In
these ways, it could be argued that these taxpayers are still
"contributing", and thus still
must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction
depends on the
purpose of a particular transaction as described in the published guidance that
caused such
transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies
419(e)
transactions, appears to be concerned with the employer's
contribution/deduction amount
rather than the continued deferral of the income in previous years. This
language may
provide the taxpayer with a solid argument in the event of an audit.
The dangers of being "listed"
A warning for 419, 412i, Sec.79 and captive insurance
Accounting Today: October 25,
By: Lance Wallach
Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in
big trouble.
In recent years, the IRS has identified many of these arrangements as abusive devices to
funnel tax deductible dollars to shareholders and classified these arrangements as "listed
transactions."
These plans were sold by insurance agents, financial planners, accountants and attorneys
seeking large life insurance commissions. In general, taxpayers who engage in a "listed
transaction" must report such transaction to the IRS on Form 8886 every year that they
"participate" in the transaction, and you do not necessarily have to make a contribution or
claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties
($200,000 for a business and $100,000 for an individual) for failure to file Form 8886 with
respect to a listed transaction.
But you are also in trouble if you file incorrectly.
I have received numerous phone calls from business owners who filed and still got fined. Not
only do you have to file Form 8886, but it has to be prepared correctly. I only know of two
people in the United States who have filed these forms properly for clients. They tell me that
was after hundreds of hours of research and over fifty phones calls to various IRS
personnel.
The filing instructions for Form 8886 presume a timely filing. Most people file late and follow
the directions for currently preparing the forms. Then the IRS fines the business owner. The
tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.
Many business owners adopted 412i, 419, captive insurance and Section 79 plans based
upon representations provided by insurance professionals that the plans were legitimate
plans and were not informed that they were engaging in a listed transaction.
Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section
6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from
these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A
penalties.
The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending
out notices proposing the imposition of Section 6707A penalties along with requests for
lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of
these taxpayers stopped taking deductions for contributions to these plans years ago, and
are confused and upset by the IRS's inquiry, especially when the taxpayer had previously
reached a monetary settlement with the IRS regarding its deductions. Logic and common
sense dictate that a penalty should not apply if the taxpayer no longer benefits from the
arrangement.
Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed
transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described
in the published guidance identifying the transaction as a listed transaction or a transaction
that is the same or substantially similar to a listed transaction. Clearly, the primary benefit in
the participation of these plans is the large tax deduction generated by such participation. It
follows that taxpayers who no longer enjoy the benefit of those large deductions are no
longer "participating ' in the listed transaction. But that is not the end of the story.
Many taxpayers who are no longer taking current tax deductions for these plans continue to
enjoy the benefit of previous tax deductions by continuing the deferral of income from
contributions and deductions taken in prior years. While the regulations do not expand on
what constitutes "reflecting the tax consequences of the strategy", it could be argued that
continued benefit from a tax deferral for a previous tax deduction is within the contemplation
of a "tax consequence" of the plan strategy. Also, many taxpayers who no longer make
contributions or claim tax deductions continue to pay administrative fees. Sometimes,
money is taken from the plan to pay premiums to keep life insurance policies in force. In
these ways, it could be argued that these taxpayers are still "contributing", and thus still
must file Form 8886.
It is clear that the extent to which a taxpayer benefits from the transaction depends on the
purpose of a particular transaction as described in the published guidance that caused such
transaction to be a listed transaction. Revenue Ruling 2004-20 which classifies 419(e)
transactions, appears to be concerned with the employer's contribution/deduction amount
rather than the continued deferral of the income in previous years. This language may
provide the taxpayer with a solid argument in the event of an audit.
Using Captive Insurance Companies for Savings
Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.
Often, they are starting what is called a "captive insurance company" - an insurer founded to write coverage for the company, companies or founders.
Here's how captive insurers work.
The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays reinsures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive.
Here's how captive insurers work.
The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays reinsures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the reinsurer pays the captive.
http://www.hg.org/article.asp?id=35592
Investment News- Business Valuations
- Investment News-Business Valuations
For years, advisors and insurance brokers have sold the 412(i) plan, a type of defined-benefit pension plan, and the 419 plan, a health and welfare plan, to small businesses as a way of providing such benefits to their employees, while also receiving a tax break.
However, in 2004, Congress changed the law to require that companies file with the Internal Revenue Service if they had these plans in place. The law change was intended to address tax shelters, particularly those set up by large companies.
Many companies and financial advisors didn't realize that this was a cause for concern, however, and now employers are receiving a great deal of scrutiny from the federal government, according to experts.
The IRS has been aggressive in auditing these plans. The fines for failing to notify the agency about them are $200,000 per business per year the plan has been in place and $100,000 per individual.
Small business retirement plans fuel litigation
Dolan Media Newswires
The penalties for such transactions are extremely high and can pile up quickly - $100,000 per individual and $200,000 per entity per tax year for each failure to disclose the transaction - often exceeding the disallowed taxes.
There are business owners who owe $6,000 in taxes but have been assessed $1.2 million in penalties. The existing cases involve many types of businesses, including doctors' offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.
A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a "springing cash value," meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.
Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums - 80 to 110 percent of the first year's premium, which could exceed $1 million.
Technically, the IRS's problems with the plans were that the "springing cash" structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.
Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.
According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.
Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.
The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.
In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.
"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."
A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."
An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.
The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.
In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.
Small business retirement plans fuel litigation
Small businesses facing audits and potentially huge tax penalties over certain types of retirement plans are filing lawsuits against those who marketed, designed and sold the plans. The 412(i) and 419(e) plans were marketed in the past several years as a way for small business owners to set up retirement or welfare benefits plans while leveraging huge tax savings, but the IRS put them on a list of abusive tax shelters and has more recently focused audits on them.The penalties for such transactions are extremely high and can pile up quickly - $100,000 per individual and $200,000 per entity per tax year for each failure to disclose the transaction - often exceeding the disallowed taxes.
There are business owners who owe $6,000 in taxes but have been assessed $1.2 million in penalties. The existing cases involve many types of businesses, including doctors' offices, dental practices, grocery store owners, mortgage companies and restaurant owners. Some are trying to negotiate with the IRS. Others are not waiting. A class action has been filed and cases in several states are ongoing. The business owners claim that they were targeted by insurance companies; and their agents to purchase the plans without any disclosure that the IRS viewed the plans as abusive tax shelters. Other defendants include financial advisors who recommended the plans, accountants who failed to fill out required tax forms and law firms that drafted opinion letters legitimizing the plans, which were used as marketing tools.
A 412(i) plan is a form of defined benefit pension plan. A 419(e) plan is a similar type of health and benefits plan. Typically, these were sold to small, privately held businesses with fewer than 20 employees and several million dollars in gross revenues. What distinguished a legitimate plan from the plans at issue were the life insurance policies used to fund them. The employer would make large cash contributions in the form of insurance premiums, deducting the entire amounts. The insurance policy was designed to have a "springing cash value," meaning that for the first 5-7 years it would have a near-zero cash value, and then spring up in value.
Just before it sprung, the owner would purchase the policy from the trust at the low cash value, thus making a tax-free transaction. After the cash value shot up, the owner could take tax-free loans against it. Meanwhile, the insurance agents collected exorbitant commissions on the premiums - 80 to 110 percent of the first year's premium, which could exceed $1 million.
Technically, the IRS's problems with the plans were that the "springing cash" structure disqualified them from being 412(i) plans and that the premiums, which dwarfed any payout to a beneficiary, violated incidental death benefit rules.
Under §6707A of the Internal Revenue Code, once the IRS flags something as an abusive tax shelter, or "listed transaction," penalties are imposed per year for each failure to disclose it. Another allegation is that businesses weren't told that they had to file Form 8886, which discloses a listed transaction.
According to Lance Wallach of Plainview, N.Y. (516-938-5007), who testifies as an expert in cases involving the plans, the vast majority of accountants either did not file the forms for their clients or did not fill them out correctly.
Because the IRS did not begin to focus audits on these types of plans until some years after they became listed transactions, the penalties have already stacked up by the time of the audits.
Another reason plaintiffs are going to court is that there are few alternatives - the penalties are not appealable and must be paid before filing an administrative claim for a refund.
The suits allege misrepresentation, fraud and other consumer claims. "In street language, they lied," said Peter Losavio, a plaintiffs' attorney in Baton Rouge, La., who is investigating several cases. So far they have had mixed results. Losavio said that the strength of an individual case would depend on the disclosures made and what the sellers knew or should have known about the risks.
In 2004, the IRS issued notices and revenue rulings indicating that the plans were listed transactions. But plaintiffs' lawyers allege that there were earlier signs that the plans ran afoul of the tax laws, evidenced by the fact that the IRS is auditing plans that existed before 2004.
"Insurance companies were aware this was dancing a tightrope," said William Noll, a tax attorney in Malvern, Pa. "These plans were being scrutinized by the IRS at the same time they were being promoted, but there wasn't any disclosure of the scrutiny to unwitting customers."
A defense attorney, who represents benefits professionals in pending lawsuits, said the main defense is that the plans complied with the regulations at the time and that "nobody can predict the future."
An employee benefits attorney who has settled several cases against insurance companies, said that although the lost tax benefit is not recoverable, other damages include the hefty commissions - which in one of his cases amounted to $860,000 the first year - as well as the costs of handling the audit and filing amended tax returns.
Defying the individualized approach an attorney filed a class action in federal court against four insurance companies claiming that they were aware that since the 1980s the IRS had been calling the policies potentially abusive and that in 2002 the IRS gave lectures calling the plans not just abusive but "criminal." A judge dismissed the case against one of the insurers that sold 412(i) plans.
The court said that the plaintiffs failed to show the statements made by the insurance companies were fraudulent at the time they were made, because IRS statements prior to the revenue rulings indicated that the agency may or may not take the position that the plans were abusive. The attorney, whose suit also names law firm for its opinion letters approving the plans, will appeal the dismissal to the 5th Circuit.
In a case that survived a similar motion to dismiss, a small business owner is suing Hartford Insurance to recover a "seven-figure" sum in penalties and fees paid to the IRS. A trial is expected in August.
Last July, in response to a letter from members of Congress, the IRS put a moratorium on collection of §6707A penalties, but only in cases where the tax benefits were less than $100,000 per year for individuals and $200,000 for entities. That moratorium was recently extended until March 1, 2010.
But tax experts say the audits and penalties continue. "There's a bit of a disconnect between what members of Congress thought they meant by suspending collection and what is happening in practice. Clients are still getting bills and threats of liens," Wallach said.
"Thousands of business owners are being hit with million-dollar-plus fines. ... The audits are continuing and escalating. I just got four calls today," he said. A bill has been introduced in Congress to make the penalties less draconian, but nobody is expecting a magic bullet.
"From what we know, Congress is looking to make the penalties more proportionate to the tax benefit received instead of a fixed amount."
Lance Wallach can be reached at: LaWallach@aol.com- 516-938-5007- or www.vebaplan.com
Business Valuations
Lance Wallach - Online
The Business Valuation Resources shows guidance on performing valuations of closely held businesses and intangible assets, including an overview of the valuation process, the factors to consider before accepting the valuation engagement, and the many methods of valuation. Additionally, it includes tools and aids that would facilitate the business valuation process.
Business Valuations by Lance Wallach
Business Valuations by Lance Wallach
We are skilled at valuing small, owner-operated businesses with annual sales of less
than $5 million. Some of our valuations are related to the buying or
selling of a business, and are used to make critical decisions like: whether to buy or
sell, how much to offer or accept, and how much to lend. In these situations,
valuations must be realistic and reasonable to be of any value.
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How To Value A Young Company
Say you’re lucky enough to find a willing investor in your young company. At some point (sooner rather than later), the guy will want to know: “How much do I have to pay for a slice of the pie–and how big a slice can I get?”
Placing a valuation on young companies is a tricky, subjective game, but it’s one small-business owners have to know how to play, especially when investment capital remains stubbornly scarce. Quote too low a figure, and you’ll give away the store; shoot too high, and the investor may blanch at your grasp of the underlying economics of the business.
Here are three techniques, some broken into parts, to help you put a value on your company. Your best bet is an amalgam of all of them. When it comes to impressing investors, the more ways you can speak their language, the better.
Of all valuation approaches, the asset approach–placing dollar values on all the assets on a company’s balance sheet and adding them up–is the most concrete.
Start with physical assets, including machinery, office furniture, computers, inventory, prototypes (and the cost to develop them). Young companies tend not to have much in the way of physical assets, but add up what you do have.
Then move on to intellectual property. This includes patents, trademarks and even incorporation papers (because the company’s name is protected). This approach may seem squishy, but the dollar amounts are real. A (rough) rule of thumb often used by investors is that each patent filed might justify $1 million increase in valuation.
Next up are all principals and employees. The value of most companies is in their people. In the dot-com boom of the late 1990s, it was not uncommon to see valuations rise by $1 million for every paid full-time programmer, engineer or designer. Don’t forget to include the value of sweat equity–as in the theoretical salaries that would have been paid to founders and executives who didn’t take them.
Also, don’t forget the customer relationships. Every customer contract is worth something, even those still in negotiation. Assign probabilities to active customer sales efforts, just as sales managers do in quantifying their teams’ forecasts. Particularly valuable are recurring revenues, like subscriptions, that don’t have to be resold every period.
Technique No. 2: The Market Approach
Another way to look at valuation is by estimating a company’s earning potential based on theoretical demand in the market.
Start by estimating the size and growth of your addressable market. The bigger the market, and the higher the growth projections (ginned up by independent analysts), the more your start-up is potentially worth. For a young, asset-light company looking to attract deep-pocketed investors, the target market should be at least $500 million in potential sales; if your business requires plenty of property, plants and equipment, the addressable market should be at least $1 billion.
Next, assess the competition and determine the barriers to entry. The stiffer the competition, the lower your valuation. On the flip side, the more fortified your company against new challengers (based on factors such as location, contracts with key customers, first-mover advantage, etc.), the more it’s worth. These intangibles translate into what’s known as goodwill–the amount a buyer might pay for your company above the value of the assets on your balance sheet. Goodwill can well bump up a valuation by a few million dollars.
Third, look at other similar companies that have managed to raise money–an exercise not unlike appraising the value of your house by comparing it to similar homes recently sold in your area. A thorough news search on Google might get you pretty far when looking for comparable deals. There are also professional valuation consultants who can pitch in–for a price, of course.
Technique No. 3: Income Valuation
The method, used extensively by financial analysts, involves projecting a company’s future cash flows and discounting them, at some rate, to arrive at their value in present dollars. The discount rate applied to start-ups is typically steep–from 30% to 60%. The younger the company, and the greater the uncertainty of its future earning power, the larger the discount rate should be. (Note: In the case of very young, pre-revenue companies, this technique may not prove very useful.)
A variation on this approach involves tallying your company’s earnings before interest, taxes, depreciation and amortization (EBITDA, to finance types) and multiplying that figure by some reasonable factor. Calculating typical EBITDA multiples for publicly traded companies in your industry is easy: Just take their market capitalizations (easily found online) and divide by EBITDA.
If running all these numbers sounds like a bit of work, well, that’s true. But, then, would you rather give away the store?
412i-419 Plans: 412i-419 Plans: RAMESH SARVA: Sarva- More You Shou...
412i-419 Plans: 412i-419 Plans: RAMESH SARVA: Sarva- More You Shou...: 412i-419 Plans: RAMESH SARVA: Sarva- More You Should Know : RAMESH SARVA: Sarva- More You Should Know : Sarva has similarly made numerous fa...
412i-419 Plans: RAMESH SARVA: Sarva- More You Should Know
412i-419 Plans: RAMESH SARVA: Sarva- More You Should Know: RAMESH SARVA: Sarva- More You Should Know : Sarva has similarly made numerous false statements to his customers about the Sea Nine VEBA plan...
412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important
412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important: KENNETH ELLIOT: Sea Nine VEBA Important : As of August 23,2013, the IRS has closed audits of 12 Sea Nine VEBA plan-participating taxpayers w...
6 days ago - 412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important. 412i-419 Plans: KENNETH ... RAMESH SARVA: Sarva- More You Should Know
6 days ago - 412i-419 Plans: RAMESH SARVA: SARVA: RAMESH SARVA: SARVA ...412i-
1 day ago - 412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important. 412i-419 Plans: ... 412i-419 Plans: RAMESH SARVA: Sarva- More You Shou.
6 days ago - KENNETH ELLIOT: Sea Nine VEBA Important: As of August 23,2013, the IRS has .... 412i-419 Plans: RAMESH SARVA: Sarva- More You Shou.
1 day ago - KENNETH ELLIOT: Sea Nine VEBA Important: As of August 23,2013, the IRS ... 412i-419 Plans: RAMESH SARVA: SARVA: RAMESH SARVA: ...
KENNETH ELLIOT - 412i-419 Plans - Blogger
419plans.blogspot.com/.../412i-419-plans-kenneth-elliot-sea-nine.html
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RAMESH SARVA - 412i-419 Plans - Blogger
419plans.blogspot.com/2014/.../412i-419-plans-ramesh-sarva-sarva_7.ht...
KENNETH ELLIOT - 412i-419 Plans - Blogger
419plans.blogspot.com/.../412i-419-plans-kenneth-elliot-sea-nine_12.ht...
412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important
419plans.blogspot.com/.../kenneth-elliot-sea-nine-veba-important.html
412i-419 Plans: KENNETH ELLIOT: Sea Nine VEBA Important
419plans.blogspot.com/.../kenneth-elliot-sea-nine-veba-important_12.ht...
Section 79 Plans: Follow the plan and get audited.
Section 79 Plans: Follow the plan and get audited.: Follow the plan and get audited. What is a Section 79 Plan? Protection, Retirement, Innovation. A permanent benefit life insurance pla...
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