Do you think a business valuation is necessary only if you’re planning on selling your business? If you answered “yes,” or are unsure, you’re not alone. Many business owners don’t realize that there are many reasons why companies obtain business valuations.
A barrel of reasons
Beyond selling your business — including splitting up and spinning off a part of the business — other reasons for performing a business valuation include:
Succession and estate planning. When transferring ownership of the business by gifting shares, a valuation can help ensure the gifts hold up under IRS examination. A valuation can also help assess the adequacy of life insurance coverage and plan an exit strategy for shareholder retirement.
Settling an owner’s estate and paying taxes. A valuation may be required for filing an estate tax return as an executor of an owner’s estate and to satisfy any related tax liability in accordance with IRS regulations.
Structuring a buy-sell agreement. Establishing business value is important when structuring agreement terms for buying back owner shares. Examples of occasions where buy-sell agreements may apply include shareholder retirements or disputes, divorce proceedings and legal division of assets, and disability or death of a shareholder.
Post transaction accounting. After a merger or acquisition, a valuation may be required to comply with Financial Accounting Standards Board requirements. In addition to purchase price allocations, a valuator can help companies evaluate asset impairment and untangle post deal tax issues.
Changing business structure. When converting, for instance, from a C to an S corporation, you may need to establish a value basis for company stock.
Structuring an employee stock ownership plan (ESOP). A possible exit strategy, as well as a tool for attracting, retaining and motivating employees, an ESOP requires establishing a value basis for company stock that can withstand scrutiny from the IRS and the Department of Labor.
Managing commercial litigation. Valuations also can be useful in legal contexts, such as an owner’s divorce, an economic damage claim, bankruptcy or a shareholder dispute. A valuator can help the parties settle their differences out of court or serve as an expert witness during trial.
No one size fits all
For most publicly traded companies, assessing value is as easy as checking the closing stock price for the day. But for a privately held business, it’s not so simple.
There are myriad variables to factor in and analyze. Your financial statements can serve as a starting point, but they won’t provide the full picture of your company’s worth. There’s no one-size-fits-all valuation method. That’s why it’s critical to retain a qualified business appraiser.
Art and science
A business valuation is a complex process of number-crunching and analysis; it’s both an art and a science. Working with a qualified valuation professional can help you obtain a more reliable and objective assessment of your company’s worth.
To learn more on the benefits of a valuation for your business please contact me by phone or email.