What are the Reasons for Creating a Business Valuation?
Certainly every business owner considers getting a business valuation at the time he or she decides to sell the business, but every business needs to have an up-to-date business valuation on hand at all times.
Here are some reasons a value a business should be done at least once a year:
- Allocation of Purchase Price – (PPA) is an application of goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquired from the transaction.
- Bankruptcy/Reorganization – A machinery and equipment appraisal or business valuation is almost always necessary during a foreclosure of a business to determine the fair market value of all assets.
- Business/Asset Valuations for Financing – Increasingly, lenders require an independent business valuation prior to approving a business loan or a credit line.
- Buy/Sell Agreements – If your business has more than one shareholder, a valuation is required to establish fair market value of the business to determine equity distribution when specified “trigger events” occur. Also, the valuation enables life insurance requirements (funding mechanism for your buy-sell agreement) to be more accurately determined and updated as required.
- C to S Corp Conversion – Business planning to convert should have a valuation done as of the date of the change. If the firm is sold prior to the ten year holding period, there is a tax due on the built-in gain of value from the date of conversion. An independent valuation substantiates the tax calculation for the IRS.
- Charitable Contributions
- Divorce/Estate Settlements – A business is typically the largest joint marital asset and the most difficult to value. A business valuation will either be court appointed or voluntarily engaged, to facilitate an equitable distribution settlement.
- Dissenters’ Rights – State legislation that allows shareholders of a corporation the right to receive a cash payment for the fair value of their share, in the event of a share-for-share merger or acquisition to which the shareholders do not consent. Dissenters’ rights allow dissenting shareholders an easy way out of the company if they do not want to be a part of the merger.
- Employee Stock Ownership Plan (ESOPs) – There are numerous financial and tax reporting situations that require qualified, independent valuation services. Examples include when the company issues stock options or transfers or sells equity interests. A valuation is required for the company to properly report related compensation expense; and, for the recipients to accurately report income.
- Estate and Gift Tax – Estate tax returns require an independent valuation as of the date of death. Gifting of closely business interests requires an independent valuation of the business at the time of ownership transition.
- Equitable Distribution
- Exit Strategy Planning – Most business owners do not plan ahead for the time when they will decide to sell their business. Often when they make up their mind to sell, the business isn’t worth what they had hoped; or isn’t even be marketable. Don’t wait until a few months before you plan to retire to find out whether or not your company is marketable at a price acceptable to you. Nationally, only 20% of small to medium sized companies listed for sale actually sell. You don’t want to be part of the other 80%. Unfortunately, ownership transfers are not always voluntary. Often, an unforeseen event, such as the owner’s death, forces the transfer of ownership. Your business planning should begin well in advance of your planned exit from the business; and, it should address both voluntary and involuntary transfers. Your planning should actually begin on day one! A formal valuation with annual updates should be one of the most important tools and an integral part of on-going strategic planning and/or exit strategy planning. Don’t leave your spouse or heirs in the position of having to make the biggest business/financial decision of their lives (i.e., the transfer of your ownership interest) without accurate information as to the fair market value of your ownership interest.
- Fairness Opinions for Fiduciaries
- Insurance Purposes – Increasingly, insurance companies require appraisals be done on equipment and/or businesses that are insured.
- Intellectual Property Valuation – In today’s increasingly complex and highly regulated business environment, the accurate and complete valuation of intellectual property is essential.
- Litigation Support – A business valuation is often needed to establish economic damages in commercial litigation proceedings; or, to determine equitable distributions in shareholder disputes.
- Mergers and Acquisitions
- Sale of a Company – Determining the value of a business is the first step in the process of selling a business. A formal valuation performed by an experienced business appraiser will determine the fair market value of your company. A valuation will prepare you to respond to buyer concerns by addressing your company’s value and risk drivers. It will also identify sources of value and areas of your business that can be improved. In addition, knowing the fair market value of your business will prepare you to be a better negotiator.