Reasons for a Business Valuation
Purchase or Sale of a Business
When hiring an expert to value a business, make sure they have knowledge of the Industry and are able to assist in negotiating the purchase or sale of business. In addition, the allocation of the price on the purchase or sale can help put additional tax savings in the bank and improve cash flow.
Shareholder Dispute
Shareholder Disputes can be difficult and costly. First you should look to your Shareholder/Partner agreement as to the handling of the dispute. If that doesn’t resolve the issue getting a professional independant valuation may assist in resolution.
Divorce
Unfortunately if a business owner is facing a divorce, he will need to have the business valued by an independent valuator. Make sure that the person that is preparing the business valuation also has experience testifying in a court room. In a divorce situation you usually will have a valuation prepared of the business by both spouses experts, and if they don’t agree will be supporting their report in a court room.
Estate & Gift Tax
It is important if you are planning your estate or will that assets be properly valued. In preparing these valuations it’s important to address appropriate discounts in the valuation process. This can allow the transfer of a larger business ownership interest or significant tax savings.
Shareholder Buy/Sell Agreements
Shareholder Buy/Sell Agreements are very important but are often overlooked. Businesses may prepare a Shareholder Agreement when a business is started but may forget to update it as the business changes. The valuation methods as stated in a Shareholder Agreement may not be indicative of the current value of the business years later as the business has grown.
For Example, I was once asked to value a business because a shareholder was retiring. I asked for the Shareholder agreement, which stated the retiring shareholder to be bought out for “Book Value”. Well, when the business was formed the 3 shareholders each contributed $10,000 to start the business. So the Shareholder agreement was to reimburse a retiring shareholder his initial investment of book value, which is only that shareholders share of assets of the company. At the time the shareholder was to retire, the Company has grown to over $10,000,000 in revenue.
Therefore, the value should be significantly higher than book value but the Company is only obligated to pay out the shareholder based on book value. So it is important to review Shareholder Agreements.
Business Purposes
A business valuation may be required for different business needs such as financing, insurance etc.
