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By MICHAEL CARTER

Most owners of private companies have only the slightest idea how much their company is worth or how to increase its value. This lack of knowledge about your most important asset results in wasted time, money, and resources.

A formal valuation of your company can have the following benefits:

1. Assists in understanding how your company value is measured by the financial community and then helps to focus your efforts on increasing this value: Once a valuation study is completed, management has a "report card," which supplies knowledge of how to increase value. Equally as important, management knows where to de-emphasize efforts that are not increasing value.
2. Reduces the chance of incorrect shareholder expectations.   When shareholders want to sell, the price of their stock is heatedly debated. Disputes distract management and shareholders and generate lawsuits. By periodically valuing your company, the issues surface before a crisis develops.
3. Improves capitalization of company.  By knowing the value of your company, you are better prepared to sell your company to bankers, investors, and suppliers. Many assets simply do not show up on your financial statements: appreciated real estate, patents, trademarks, owner's full compensation, customer list, working fully- depreciated equipment, etc.
4. Attracts additional sources of capital.   It is important to understand how value is built and how your company's intangible value can attract new capital such as mezzanine lenders and institutional equity sources.
5. Confirms the appropriate price when buying or selling stock in a privately held company.  The private equity and mergers & acquisition markets for middle market companies are inefficient. Two comparable companies can sell stock at wide differences in price-as large as 50%.  Valuations are used when companies purchase stock from shareholders. A valuation provides assurance that these shareholders are treated fairly. If too generous, the company is paying out resources unnecessarily; if too frugal, the company may be risking a lawsuit if it is sold in the near future at a significant premium.
6. Assists with succession planning and estate planning. In order to implement a succession plan or estate plan it is important to know your company's value. The commonly used estate freeze involves the use of preferred stock while giving the common stock to the next generation, thereby providing them all future appreciation. This technique requires a valuation that will stand up to IRS scrutiny. In addition, giving stock should be accompanied by a valuation to provide proof of the value of the gift.
7. Assists in evaluating insurance needs.   Companies spend thousands of dollars to insure their physical assets: inventory, machinery, and a warehouse, but rarely consider the full value of the company itself. This value is critical in purchasing the correct amount of insurance for several types of policies: buy-sell agreements funded by insurance, key man life insurance, uninterrupted business insurance, loan insurance, and Directors' and Officers' insurance.
8. Assists in structuring an incentive stock option plan and other incentive programs. An employee pays no taxes when granted an incentive stock option or when exercising it. The employee pays taxes when selling the stock. To qualify as an incentive stock option, a stock's price must equal or exceed its fair market value when the option is granted. Accordingly, the valuation may significantly affect the incentive stock option plan.
9. Confirms the price of an initial public offering.   In an Initial Public Offering the company's stock is valued. The underwriter exercises a great deal of judgment about the price the public is willing to pay for the stock. A company should ask an independent appraiser to confirm the proposed offering price.
10. Supports the price on a charitable contribution.  When an owner of a closely held company gives part or all of his interest in the business to a charity, he must support the deduction taken. If the amount of the tax deduction warrants the expense, the donor should obtain a valuation of the gift when it is given. Furthermore, recent legislation requires that a valuation be submitted if the value of the gift exceeds $500,000.

If you would like to receive a checklist for evaluating an appraisal report, please call our office and request the Appraisal Checklist.

Michael Carter is a managing director of Carter Morse & Mathias, an investment banking firm based in Southport, Conn., specializing in raising capital, mergers and acquisitions, and valuations.