Key Person app, question asks for fair market value of the business, how to not misrepresent this?

May 16, 2018

  1. yorkriver1
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    yorkriver1 Guru

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    One part of the business was just purchased for a little over $1,000,000. The purchaser merged their existing business.
    I would use the purchase price as FMV. Adding the original business value would be like having an appraisal, based on projection of intangibles about the business.
    The owner is relying on the tax/accounting firm to get me #'s, but they only have P&L statements.
    If we didn't just make an educated estimate on things applications ask, we'd never get anything done, but this one concerns me, as it's the first time I have encountered that question.
    Face value $2,000,000 which also includes an amount which will be a under a collateral assignment for the remaining balance owed to purchase the business, paid out over the terms agreed to. The balance of proceeds to be used to operate the business in the event of owner's death.
     
  2. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    You need a business valuation report acceptable to the IRS.

    VSA offers these tools for $23.95/month after a 30-day free trial.
    Calculators
     
    DHK, May 16, 2018
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  3. yorkriver1
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    yorkriver1 Guru

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    If we could assume the CPA would probably already have this software, then he/she would be able to provide this. On further discussion, I learned the accounting firm has stated they CPA is away, and they were looking to get CPA to get valuation #'s.
     
  4. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    This is not rocket science, the carrier does not expect it to be an exact number. Business Valuations are subjective anyway.

    Put down what the business just sold at. For many different reasons, that would be the number to use on the app.

    You are overthinking this WAY too much.
     
    scagnt83, May 16, 2018
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  5. DigitalBGA.com
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    DigitalBGA.com Expert

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    I agree with scagnt83...you are overthinking this.

    Look at the application: it will ask you specifically what is needed on a business case. FMV, business financials, revenue numbers etc. A value was already placed if a piece of the biz just sold for $1m. Find out what that piece was worth % wise and do the math.

    For large business cases that are hard to value, go to Principal. They have business valuation specialists/CPAs on staff that will do a pretty granular business valuation report. Simple forms to fill out and usually within a week you have a killer report to deliver to a business owner that they can literally take to the bank for financing if they wanted to. Principal of course wants that business and this is their investment into getting it.
     
  6. yorkriver1
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    yorkriver1 Guru

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    Principal quote was involved in proposals and may be 2nd choice, 1st one is signed and submitted, noted to carrier: will send the answer on the financial question asap. Will most likely just use the sale price of purchased business as value.
    Thanks for input!
     
  7. VolAgent
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    VolAgent Guru

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    As long as you have some documentation as to how you came up with the number, and you didn't fudge the documentation, don't worry about misrepresentation. If they want more/better evidence, they will ask for it.

    I think sometimes we forget that the statements on an application are a representation and not a warranty and what that distinction means.

    You are not saying it is categorically true. You are say it is true to the best of your knowledge and belief.
     
    VolAgent, May 17, 2018
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  8. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    A real easy way to determine value is to use a multiple of profits. Sometimes carriers will want to see the P&L statement, often they will apply a multiple to the profits to judge suitability of the DB.

    The exact multiple can depend on industry, but as long as you dont go over 5x profits you should be fine.
     
    scagnt83, May 17, 2018
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