Tim McDaniel - Know and Grow the Value of Your Business: An Owners Guide to Retiring Rich

About the Author

Tim McDaniel is a shareholder at Rea & Associates, Inc., a large regional public accounting firm. McDaniel directs the business valuation and succession planning practice for the firm. He has over 22 years of experience and has been involved in over 2,000 valuation and planning engagements. He also provided services in the firms former M&A transaction practice, giving him significant real-world experience to pass on to his clients. McDaniel prides himself on being able to teach business owners in everyday language how to value their most prized assettheir company. He shows them practical ways to increase the value of their business and how to successfully exit their business on their terms.

He is a certified public accountant and the author of nearly 20 articles in publications like CPA Voice, American Venture Magazine, and Valuation Strategies. He has obtained the top three professional valuation credentials (ASA , CBA, ABV). He is also an active speaker on valuation, exit strategies, and succession planning, and he has served an expert witness in over two dozen cases.

McDaniel lives in Westerville, Ohio with his wife, April, and his three children, Drew, Elle, and Charlie.

Acknowledgments

I was hesitant to write this book when I was contacted by Jeff Olson in May of 2012. For many reasons, it did not appear to be the right time in my life to devote the time needed to write such a book. However, with the encouragement and support of my family, my Rea Partners, and the Apress team I decided to move forward and those are the people that I would like to thank. I have such a passion to teach business owners about the valuation of their business, how to make it more valuable, and which exit strategies to pursue. I am grateful for those that made it possible to express this passion in this book.

This book would not exist without Jeff Olson and the Apress team. I am grateful for Jeffs confidence in me and his support throughout the process. There are many others from Apress, including Rita Fernando, who have been invaluable to work with. Because of their input and advice this book is much more valuable to the reader.

I would like to thank my colleagues and partners at Rea & Associates, Inc. I am very fortunate to be working with a group of men and women who are bright and compassionate people. This book would not be possible without their support over the years. A special thanks to my decade-long valuation team members, Bruce Bernard and Holly Taylor, for teaching me so much.

Most importantly, I would like to thank my wife and children. Without their patience and willingness to sacrifice, this book would still be a dream. To Drew, Elle, and Charlie, thank you for teaching me so much about life and being such special kids. To my wife April, I am grateful for your endurance with this project (and me) and your willingness to discuss and edit the work of a CPA. You all are such a blessing to me, and I am a very lucky man to have each one of you in my life.

APPENDIX
A

IRS Revenue Ruling 59-60

In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined.

Revenue Ruling 54-77, C.B. 1954-1, 187, superseded.

Section 1. Purpose

The purpose of this Revenue Ruling is to outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes. The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value.

Sec. 2. Background and Definitions

.01 All valuations must be made in accordance with the applicable provisions of the Internal Revenue Code of 1954 [*2] and the Federal Estate Tax and Gift Tax Regulations. Sections 2031(a), 2032 and 2512(a) of the 1954 Code (sections 811 and 1005 of the 1939 Code) require that the property to be included in the gross estate, or made the subject of a gift, shall be taxed on the basis of the value of the property at the time of death of the decedent, the alternate date if so elected, or the date of gift.

.02 Section 20.2031-1(b) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and section 25.2512-1 of the Gift Tax Regulations (section 86.19 of Gift Tax Regulations 108) define fair market value, in effect, as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.

.03 Closely held corporations are those corporations the shares of which are owned [*3] by a relatively limited number of stockholders. Often the entire stock issue is held by one family. The result of this situation is that little, if any, trading in the shares takes place. There is, therefore, no established market for the stock and such sales as occur at irregular intervals seldom reflect all of the elements of a representative transaction as defined by the term fair market value. {238}

Sec. 3. Approach to Valuation

.01 A determination of fair market value, being a question of fact, will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases. Often, an appraiser will find wide differences of opinion as to the fair market value of a particular stock. In resolving such differences, he should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science. A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.

.02 [*4] The fair market value of specific shares of stock will vary as general economic conditions change from normal to boom or depression, that is, according to the degree of optimism or pessimism with which the investing public regards the future at the required date of appraisal. Uncertainty as to the stability or continuity of the future income from a property decreases its value by increasing the risk of loss of earnings and value in the future. The value of shares of stock of a company with very uncertain future prospects is highly speculative. The appraiser must exercise his judgment as to the degree of risk attaching to the business of the corporation which issued the stock, but that judgment must be related to all of the other factors affecting value.

.03 Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal. As a generalization, the prices of stocks which are traded in volume in a free and active market by informed persons best reflect the consensus of the investing public as to what the future holds for the corporations and industries represented. When a stock is closely held, is traded [*5] infrequently, or is traded in an erratic market, some other measure of value must be used. In many instances, the next best measure may be found in the prices at which the stocks of companies engaged in the same or a similar line of business are selling in a free and open market.