Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

What's Your Business Really Worth? Part 2

February 2018

Key Takeaways:

·       There are at least 7 different ways to value a private business: Here we will explore Liquidation Value, Market Value, Fair Market Value and Owner’s Value.

·        Market value is a technique for showing how your business will look to different types of buyers. Using this method, you can start to zero in on which type of buyer is right for your company.

·        Too often businesses are liquidated when they could have been saved with an intervention by an astute owner or advisor.

In Part 1, we looked at three common business valuation methods: Financial or Investment Value; Strategic Value and Intangible Asset Value. Here we’ll look at four more: Liquidation Value, Market Value, Fair Market Value and Owner’s Value.

Let’s start with one of the most common: Liquidation Value.

4. Liquidation Value

This value is the sad one. Remember the enterprise we talked about in Part 1--the business had 80 percent of its revenue in one basket—with one big customer—and that customer was looking at other suppliers?

Fast forward to a year later when the large customer decided to move its business to another supplier. There is a good chance that this $5 million business won’t be economically viable at $1 million. The owner at this point has no alternative but to liquidate the assets and try to stay out of bankruptcy.

When you are in this situation—there might be no buyer or, even worse, the business could easily be at risk. Too often businesses are liquidated when they could have been saved with an intervention by an astute owner or advisor.

5. Market Value

Market value is the range of values a company could sell for. This is what a buyer is likely to offer and the terms that the buyer might use. Market value is a technique for showing how your business will look to different types of buyers. Using this method, you can start to zero in on which type of buyer is right for your company.

When doing a financial plan for your business, it’s often a good idea to use a computer program that allows for various values and outcomes. This way you get to see what the range of outcomes could be for your business.

Market value is what real buyers are willing to pay for a business. You’ll really never know what the true market value of a company is until you actually try to sell it.

6. Fair market value

If you go to a valuation expert, you’ll get an estimate of the prices that a willing buyer and willing seller would agree to.

The truth is that fair market valuations are very often wrong. When Mr. Market gets ahold of a business, there will be a completely different set of valuations used. The value from a fair market valuation will either be higher or lower than the market value.

Fair market valuation is important when businesses are being transferred to families or when there is an ESOP (Employee Stock Ownership Plan) involved. Both scenarios require a fair market valuation as part of the business transfer process.

7. Owner’s Value

This is the most dangerous value of all. Owners will almost always value their businesses at a significantly higher price than any buyer is willing to pay. The fact is most businesses will not get the owner to retirement without additional income and savings. You need to understand that investment real estate and qualified retirement plans are crucial if you ever want to leave your business and never have to work for someone else.

Remember to factor taxes in the equation

As an entrepreneur planning for retirement, knowing what the tax bite will be is another determining factor in whether the business is valuable enough for retirement. The difference can be as much as 30 to 40 percent of the proceeds left over from the initial sales price.

You will also want to factor in the closing costs of a transaction. It’s not unusual for 10 to 15 percent of the sales price to be eaten up by business brokers, accountants and lawyers.


The challenge of valuing a business is knowing what the enterprise is worth to someone else. Sometimes it’s best to work on increasing value and finding ways to move into a more attractive value world before selling. The more informed you are, the better your business exit will be both from a financial and an emotional perspective.


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What's Your Business Really Worth? Part 1

November 2017

Key Takeaways:
• Private businesses can have multiple values depending on who the potential buyers are—and what each the buyer’s needs are.
• Business owners need to realize that taxes and expenses are part of the sales process.
• There are at least 7 different ways to value a private business: Here we will explore Financial and Investment Value, Strategic Value and Intangible Asset Value.

This would be a simple question to answer if your company was publicly traded. If you’re working in the private business world and you’ve tried to gauge whether you can afford to retire, you probably have been stumped figuring out what to use for the after-tax value of a business sale.

Owners almost never really understand the value of their businesses. This is because they don’t know that businesses can live in multiple value worlds, depending on who the potential buyers are and the valuation method used.

The concept of value worlds
Depending on who the buyer is, or if there even is a buyer, the value of your business can vary dramatically. Let’s say you have a business that does $5 million in sales and produces $150,000 in profit. You would think your business could be sold for about $750,000 (5 times its profit). But what if this business had only one customer that accounted for $4 million of the company’s $5 million in sales, and what if that customer was looking at other suppliers? Some valuation methods would take that vulnerability into account while others would not.

Let’s look at another business that has a patented process that serves to build a large moat around the company. Like the first company in our example, this company does $5 million in sales, but it has profits of $500,000 and has plans to grow to $50 million with a profit margin of 20 percent. In this case, one type of buyer might offer $2.5 million and another buyer might be willing to pay $25 million.

Understanding where your business falls in the land of value worlds will mean the difference between pursuing the right strategy and pursuing one in which disaster might strike.
First, you need to know what value worlds are and where your business falls.

The different value worlds
Here are the seven value worlds that I recommend you understand before making such a big decision about the enterprise you have worked so hard to build:

1. Financial or Investment Value
2. Strategic Value
3. Intangible Asset Value
4. Liquidation Value
5. Market Value
6. Fair Market Value
7. Owner’s Value

The key is to know which world you are going to show up in today and what you can do to move toward higher-value worlds.

Let’s now take a look at each of the value worlds:

1. Financial value
This is used by a private equity firm or by any other buyer that is considering purchasing your company primarily as an investment. Financial value buyers are often good buyers, but they have no motivation to pay any more than what the financial statements would suggest so they can get a reasonable financial return on their investment.

A financial buyer is the one who would pay about $2.5 million for the second company in our example, the one with $500,000 in annual profits. A financial buyer looks at what the company has done and what will likely happen in the short term. They don’t have a reason to pay higher multiples (or goodwill) because they look at the business as an investment and not an opportunity.

A financial buyer would have a great deal of interest in our second business and probably no interest in our first example.

2. Strategic Value
A strategic value buyer is one that will look at the business and believe the value in owning the business is much higher than simply a financial return. The strategic buyer might be a competitor, or it might be a larger company that thinks your business has a good fit with their business. The strategic buyer believes that combining the two companies would make the value of the target company higher than a financial buyer might think.
Strategic buyers might have an interest in the first company. If the product line fits in well, they could get rid of all the overhead, and if they felt they could hold the large customer, they might want to buy—but with lots of strings attached.

A strategic buyer would love to own the second company. If it’s a larger company, the buyer would believe it could add the product line and help the acquired company take advantage of the opportunity. As much as a strategic buyer would like to own the second company in our example, it would likely lose out to our next type of buyer (an intangible asset value buyer).

3. Intangible Asset Value

This buyer wants a company, and the amount of money it pays has no apparent relationship to the amount of profit the company produces. My favorite example of this type of deal was when Microsoft bought Skype. The multiple of profits was so high that no one even mentioned it. Microsoft bought Skype because of the intellectual property Skype had. (It also didn’t hurt that a full bidding war erupted over that acquisition.)

The second company in our example would be a perfect acquisition target for an intangible asset sale buyer. A larger company could scale the technology and move this company easily to $50 million in sales. For this type of buyer, even a $5 million purchase price might not get the deal done.

In part 2 of this article, we’ll look closer at Values 4-7: Liquidation Value, Market Value, Fair Market Value and Owner’s Value.


Remember, your business isn’t really valued on how much you’ve put into it; it’s valued based on how much a rational buyer is willing to pay (i.e. What’s in it for Them?). Sometimes it’s best to work on increasing value and to move into a more attractive value world before selling. The more informed you are; the better your chances of having a financially (and emotionally) satisfying exit.


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Simple Gifts and Planned Gifts

August 2017

Key Takeaways
• With people living longer, particularly the affluent, the calculus of planned giving has been turned on its head.
• Make sure you consider trust payout rates, investment returns, tax brackets, economic conditions and institutional “mission drift” when designing planned gifts.
• Creating a gift as a stand-alone, tactical solution can be more dangerous than it appears. You need to see the gift from the context of your complete, financial picture.

The simplest gifts are transactional in nature. A check is written or marketable securities are transferred and the transaction is completed. On the other hand, planned gifts tend to be more complicated. Planned gifts tend to be larger than simple gifts. The asset(s) may be more complex and an intervening legal structure is frequently required. A planned gift, while created for tax purposes, may span one or more lifetimes before it truly completes. Since the lifespan of a planned gift can be quite long, thorough and thoughtful attention must be paid to a number of factors that may impact the eventual result of the gift’s original charitable intent.

Planned Giving 2.0: A new variable in the gift equation

We often consider trust payout rates, investment returns, tax brackets, economic conditions and even possible institutional changes (we call this mission drift) when a family designs and completes a planned gift. If that’s not enough, you should also consider the gift within the context of your health and life expectancy.

The Internal Revenue Service (IRS) publishes actuarial tables and calculation factors in Publications 1457-1459 that provide the general substance and guidance for computing the various charitable factors for any planned gift: charitable income tax deduction; remainder interest; value of life estates, etc. Applying the properly published factor is a simple matter. However, we’ve seen many fail to contemplate two variables that may cause an unanticipated failure of an otherwise properly reasoned gift:

1. The continued use of outdated mortality tables by the IRS. The publications above are still based on the 2000CM tables. It’s important to remember that in the standard 2000CM tables, “mortality” refers to an age at which 50 percent of the people in any age group are assumed to have died --and 50 percent are still alive.

2. Life expectancy for high-net-worth individuals is increasing even faster than it is for the general population (more on that in a minute).

Dramatic changes in life expectancy

Yet, according to the Center for Disease Control’s (CDC’s) National Vital Statistics Report, life expectancy has been climbing steadily upward since 2000. With improving medical interventions especially in the “high cause of death” diseases, there is good reason to believe that life expectancies will continue to improve. This means gift planners are simply not able to change their calculations on a whim.

Factors driving longer life expectancy

As an example, the two leading killers, according to the CDC, are cancer and heart attacks. Both diseases have experienced dramatic declines in mortality. Every year, the medical field makes steady gains in the fight against cancer. Last April, the National Cancer Institute (NCI) published new findings about the incidence of cancer and related death rates. The bottom line is that both incidence and death rates of cancer fell. The mortality rate fell 1.5 percent per year on average from all cancers from 2002 to 2011. Over the same period, new cancer cases dropped 0.5 percent annually. The NCI study showed that improvements were consistent for men, women, and children, across all types of cancer, especially the deadliest types: lung, breast, and colon.

According to the American Heart Association, death rates from heart disease fell 38 percent from 2003 to 2013. And according to the U.S. National Heart, Lung, Blood Institute, the decline was accelerated by new drugs that control cholesterol and blood pressure, reduced smoking rates, and faster care for people in the midst of a heart attack.

You must follow IRS guidance, however, you can change the way you and your family think about (and design) long term gifts.

Compounding the challenge

While overall life expectancy is improving for the general population, it’s increasing even faster among high net worth individuals. There are a number of reasons for this. Primarily it’s because the affluent have better access to health care then the general population does. By “health care,” we’re referring to everything from access to the best physicians and personal trainers to experimental procedures and concierge medical services. High-net-worth individuals are more likely than others to make large planned gifts.


The single best solution for planned giving in today’s era of extended longevity is to take a comprehensive approach. Designing a gift as a stand-alone, tactical solution can be more dangerous than it appears. Knowing the entirety your financial situation, and understanding your cash flow, asset growth potential and estate planning considerations will allow you and your advisor to make more reasonable assumptions and forecasts.


While no one wants to diminish a gift, it may well be the best course of action. Other avenues include, exploring lower payout rates, making certain to look “past” the IRS mortality tables to ensure that the gift works will work for 10 or even 20 more years. We can help you understand how Monte Carlo simulations and other modeling tools can help you create more balanced and diversified investment portfolios for this purpose.
Gifting is one of the most gratifying ways for you and your family to support the good work of causes close to you. Just make sure you’re giving in a strategic and tax advantaged way so you’ll have more resources to share with word down the road.




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Financial and Tax-Related Identity Theft - Part Two

 April 2017

Key Takeaways:
•Tax-related identity theft is the newest and most dangerous financial problem.
•The IRS has implemented recent steps to reduce the impact of identity theft.
•Once there is a personal data breach, clients and their advisors must move quickly to minimize financial and credit rating damage.

As I discussed in Part 1 of this article, identity theft is now the most common consumer complaint—with over 10 million total identity theft cases per year. It not only has tarnished the reputations of Fortune 500 brands such as Anthem, Target and Home Depot, but it also has infiltrated security-conscious government agencies, including the Internal Revenue Service.

The IRS has been slow to respond to these issues. However, with taxpayers and Congress turning up the heat, the IRS has recently taken a few positive steps to help prevent and resolve tax identity theft cases. False returns are often filed early in the tax season using the victim’s Social Security number and a revised address so that the thief can benefit from the fraudulent refund.

Once you believe your personal data may have been compromised, it is critical to act quickly, since thieves will not limit the scope of their attack. So consider all of the following steps:
•Subscribe to a credit monitoring service such as www.creditchecktotal.com
•Place a credit freeze at each of the three credit bureaus—Equifax, Experian and TransUnion.
•Call the IRS at 800-908-4490 to determine whether anyone has filed a tax return under your name or Social Security number—including for prior years.
•File an Identity Theft Affidavit (Form 14039) with the IRS—see discussion below.
•File an Identity Theft Affidavit with your state tax authorities.
•Obtain an IP (identity protection)
•File a police report.
•File a complaint with the FTC at 877-438-4338 or www.identitytheft.gov

In an attempt to prevent these cases, the IRS has created Form 14039–Identity Theft Affidavit. The form was created for taxpayers to warn the IRS if they may be at risk for identity theft so the IRS can flag the account and increase its oversight for suspicious activity. For suspicious returns, the IRS will contact the taxpayer and ask the person for personal information to verify his or her identity. If the taxpayer is unable to respond in a timely manner with accurate information (e.g., prior home and business addresses, AGI on prior returns, etc.), the return will automatically be marked as “fraudulent” and essentially frozen in the IRS’ system. If a taxpayer accidentally answers a question incorrectly or does not know an answer, the IRS representative will typically work with the taxpayer to sort out his or her true identity. An identity thief will typically hang up on the IRS as soon as he or she answers one question wrong!

Since changing the unsuspecting taxpayer’s mailing address is a common method for hijacking refunds, the IRS is closely monitoring any changes in a taxpayer’s address(es). Therefore, self-preparers and paid tax preparers need to be especially careful when completing their clients’ business and home addresses on current filings. Simply adding a “c/o” reference, middle initial, or changing a suite reference can flag a return as potentially fraudulent—thereby delaying processing and timing of refunds.

Once a return has been flagged, the IRS will assign the case to an assistor. When this occurs, the return will no longer be a priority for the IRS, and it can take six months or more to resolve the case. Most taxpayers will not want to wait six months to get their cases resolved, so it’s more important than ever for preparers to complete clients’ returns thoroughly and accurately in the current environment.

If and when a flagged return is finally resolved, the IRS requires that the taxpayer create a PIN to prevent future fraud cases. The PIN is used in place of the taxpayer’s Social Security number in case the thief attempts to file another fraudulent return. The IRS will also send out notices to taxpayers they believe might be at risk of identity theft.

However, the IRS can come up with only a limited number of precautions and resolutions; ultimately, it is your clients’ (the taxpayers’) job to protect their personal information, especially their Social Security numbers. With today’s technology, it is easy to be scammed into entering information on a website that seems trustworthy. Even if information is being sent through an email or text message to a friend, a thief can easily intercept the message or read it on an email server. If email is the only way for clients to send you their Social Security numbers, make sure the email is fully encrypted.

As I mentioned in Part 1, you can take certain precautions to prevent these breaches from occurring in the first place. Again, here are some precautions that you can take to prevent identity theft:
•Enroll in various credit monitoring services. Note that most people can get free credit monitoring services as a result of being a customer of Anthem, Target, Home Depot, or other retailers or financial institutions that experienced a credit card database breach.
•Shred any personal files at home and at work.
•Protect Social Security numbers on the web, over the phone and in letters, etc. Generally speaking, including the last four digits is fine for existing accounts.
•Prevent personal financial information from being shared over the phone unless you are positive who the other party is. A good rule of thumb for incoming calls associated with any accounts is to get the caller’s number, check the number and return the call if it looks legitimate.
•Do not use public Wi-Fi networks when dealing with banking, investment and tax data. Use a secured virtual private network (VPN), and encrypt emails if personal information must be sent via the Internet.
•Many umbrella insurance policies provide services and cover costs to repair damage caused by identity theft.

Identity theft and tax cloning are preferred scams for thieves because of their high financial payoff potential and relatively low risk. Thieves know it’s hard to trace who actually filed the return and obtained the refund.

Furthermore, even when they are caught, white collar crime perpetrators often get off with relatively minimal prison time. To help clients protect themselves against tax identity theft, encourage them to follow the basic rules of keeping their Social Security numbers, dates of birth and account passwords confidential whenever possible.

There’s a high probability that you have personal information that has been compromised via one of the many recent high-profile breaches. Periodically check your credit reports and sign up for credit monitoring (again, this should be free for most). When there is any possibility of a breach of account information, taxpayers should immediately alert the IRS and the state tax authorities so that they can watch for any suspicious activity on the taxpayers’ tax accounts.

Article courtesy of CEG Worldwide, LLC, 2017 www.cegworldwide.com | info@cegworldwide.com


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