BUSINESS
VALUATIONS:
KNOW YOUR BUSINESS’S TRUE WORTH
Regardless of the size or type of your business, there’s at least one thing you should know for sure: how much the business is worth. Your business’s value can change over time, and that means you can be caught unaware if you suddenly must sell the business. To prevent this, it is recommended that you obtain a business valuation.
What
is a BUSINESS VALUATION?
The reason for obtaining a business valuation, or business appraisal as it is also called is to get an impartial opinion as to the value of the business. Valuations typically determine the “fair market value” of a company. Keep in mind that this may be different than the “value” that you had in mind. The Internal Revenue Service (IRS) has defined “fair market value” as the price at which property would change hands between a willing buyer and a willing seller, when the seller is not under any compulsion to sell, and both parties have reasonable knowledge of the relevant facts.
WHAT
IS VALUE?
The value of a business is also dependent on the facts and circumstances specific to the individual situation. Valuations take into consideration a business’s past financial performance, its present financial condition and performance and, most importantly, its future prospects. Economic factors, industry trends, and management issues impacting the business also are assessed.
Be aware, too, that there are different methods for valuing a business. These vary depending on such things as the relative size of ownership being valued, the nature of the business, the services it provides, and how the valuation will be used.
HOW
CAN BUSINESS VALUATIONS HELP YOU?
Here are some reasons why you may need a business valuation:
Buying a business. You
should get the prospective business professionally valued so you understand the
full worth of your investment.
Selling a business. The
IRS requires a full valuation to support the allocation of the total purchase
price and its components for tax purposes.
Developing an estate plan.
If you are planning to pass on the business to your heirs, it’s critical to
understand its worth. This will help to ensure that you distribute your estate
equitably.
Determining stockholder/partnership buyout terms. When considering buying out an individual or partner, the last thing you want to do is shell out more money than necessary. A business valuation will assure you that your offer is on target.
Obtaining additional financing.
A valuation may disclose additional information that a business’s
financial statement may not provide. This can affect the amount that a lender is
willing to make available.
Planning a merger or acquisition. Valuations
are required of at least one and generally both businesses in a merger or
acquisition.
Dissolving or selling your business.
For tax and financial reporting purposes, valuations are generally
necessary. Besides, you may find that the business is even worth more than you
thought.
Offering employee stock and
ownership plans (ESOP). An ESOP can provide certain tax and
additional advantages for private companies, as well as offer significant
employee incentives. To offer such plans, a valuation of the employer’s
securities must be performed at the onset and thereafter at least annually.
Planning your divorce. In
the case of divorce, equitable distribution rules may require that a spouse’s
ownership interest in a closely held business generally be valued as of the date
of the complaint.
WHAT TO LOOK FOR IN A BUSINESS VALUATION SPECIALIST
Since a business is often an individual’s most valuable asset, it is important that the valuation be conducted by a qualified professional. The individual should have experience in performing valuations and possess tax and business know-how. For example, CPAs are experienced business advisors, accustomed to working with management on numerous strategic, operational and financial matters. They are also adept at dealing with the IRS on behalf of their clients. Some CPAs also possess an accreditation in business valuation (ABV) from the American Institute of Certified Public Accountants (AICPA) and/or a Certificate in Educational Achievement (CEA) in business valuation from the California CPA Education Foundation. For more information, contact the AICPA at (212) 596-6069.