Buffett Got It Right This Time

This article was written with Steve Cordasco, of Cordasco financial network. It's part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

Steve Cordasco and David Evanson

TheStreet.com, Summer, 2012

NEW YORK (TheStreet) — Over the past three years Izzve found myself disagreeing with Warren Buffett more and more.

However, speaking to investors at Berkshire Hathawayzzs annual meeting this year, he finally said something I agree with: “If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory. Rather, B-schools should be encouraging students to learn the boring, but critically important, discipline of business valuation.”

There are 27 million small business owners according to the Small Business Administrationzzs 2009 census. I would posit just a small fraction of these actually know what their business is worth. Worse, typically, a small business owner has some 90% of their net worth tied up in the business.

This is a very dangerous bit of ignorance on the part of business owners. Reason: Ceteris Paribas, the federal estate tax exemption will fall from $5 million to $1 million at the end of this year. That mean if you own a business worth $4 million, upon death, $3 million is subject to federal estate tax as high as 55% or $1.65 million.

The possible end games are not pretty:

Litigate with the feds over the value of your business. Remember, this is the same Fed that has been printing money for the last several years.
Wipe out your liquid net worth to pay estate taxes owed on the business.
Sell the business to pay the estate taxes.
What keeps many small business owners from understanding what their business is worth is the cost. A business valuation study done by a qualified professional can start at $10,000, and many times costs much more.

But now therezzs no excuse. New online service and software from companies like BizEquity make the process simple and inexpensive. Izzve helped clients get a handle on their estate-planning needs with business valuations that cost well under $1,000. Remember, when it comes to estate planning, one of the big questions you are trying to answer is whether or not you need $250,000 of life insurance, or $2.5 million. And to understand that, you shouldnzzt have to spend $10,000 or more.

Is there value from a full-blown study? Absolutely. But remember, the underpinnings of business valuations lie in time-tested formulas related to earnings, growth, assets and liabilities. Converting these to an algorithm preserves much of the integrity of conventional business valuation techniques.

If youzzve got an unusual business, with rare assets, liabilities or cashflows, this might not be the solution for you. Hopefully, companies like Dun & Bradstreet(DNB_) or Google(GOOG_) will offer a cost effective service one day like BizEquity.

One other bit of advice. If you own a business and are in a marriage that you are not sure is going to survive, think long and hard about whose property the study is, who knows about the existence of the valuation and where itzzs kept. If things go south in the relationship, a third-party business valuation might turn out to be the smoking gun your departing spouse needs to hold you upside down by your ankles and shake.

Under the right circumstances, having your attorney conduct the study on your behalf might shroud itszz existence behind the attorney/client privilege.

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