Business valuations are performed because ownership interests in privately-held companies often represent a significant portion of one’s estate and/or portfolio. The value, or worth, of an interest in a privately-held company, as opposed to stock in a public company, is usually unknown because there is no active market in which to sell or calculatortrade that interest. Value determinations are most commonly needed to calculate estate tax upon death, divide family assets in a divorce, or negotiate value in a purchase, sale, or merger of a business. Below is a list of these and other situations in which the owner of a business might need a valuation for his or her interest.
- Actions in Eminent Domain
- Buy/Sell Agreements
- Charitable Contributions
- Damages for Disruption of a Business
- Dissenting Shareholder Actions
- Employee Stock Ownership Plans (ESOPs)
- Estate Tax Planning and Determinations
- Family Limited Partnerships
- Gifting Programs and Gift Taxes
- Initial Public Offerings
- Life Insurance
- Marital Dissolution
- Partner Disputes and Split-Ups
- Purchase, Sale, Merger of a Business
- Spin-Offs of a Division or a Subsidiary
- Succession/Exit Planning
- Venture Capital and Other Forms of Financing
How can a professional valuation consultant help you?
Many business owners believe the value of their business is net profit, or gross sales, multiplied by an industry rule of thumb. This is simply not the case. In fact, the application of an industry rule of thumb formula often results in a value determination that differs significantly from the actual value that could be determined by a qualified business valuation professional.
The consequences of an inaccurate valuation—too high or too low—generally lead to undesirable consequences. For instance, if the valuation for an estate tax return is too high, then estate taxes will be too high. If the valuation for the sale of a business is too low, the business owner risks limiting his or her return on the sale. In a marital dissolution, you want to know that you are receiving a fair value for your interest.
Determining the true value of a business requires a careful analysis of two primary components that make up value: tangible assets such as real estate, machinery, and furniture used by the business, and various intangible assets such as business goodwill. Intangible assets might also include customer lists, trademarks, copyrights, distribution rights, a superior management team, non-compete agreements, physical location, special processes and name recognition. Quite often, the value of a company’s intangible assets is much greater than the value of its tangible assets. Valuing intangibles, however, requires the services of a qualified business valuation professional. It requires a careful analysis of the many aspects and facets of a business enterprise utilizing knowledge acquired through training in all aspects of business fundamentals, including finance and valuation applications, and draws upon a skill set acquired through a range of experiences both working with and valuing business enterprises.
What is important in selecting a valuation professional?
A valuation professional should be able to demonstrate through education, training, and experience that he or she has the knowledge and a level of competency in valuing business enterprises. Of the utmost importance is one’s affiliation with a recognized valuation organization such as the National Association of Certified Valuation Analysts (NACVA), and the American Institute of Certified Public Accountants (AICPA). Members of both organizations are required to adhere to industry standards in performing valuation services and communicating their conclusions of value. Standards are intended to assure users the services they receive meet an industry-acceptable level of due care. Furthermore, industry standards require adherence to ethical guidelines in the performance of valuation engagements, providing added assurance to users that the valuator they hire perform his or her services conscientiously and competently to the best of his or her abilities.
Did you know? Advice from a valuation professional can prevent you from overpaying for a business or selling it too low. It can minimize your tax liability and reduce costs that are based on a percentage of value. It can also maximize your borrowing power.
A Value-Added Service
A prime objective of every business enterprise, large or small, is to improve and maximize its value to the owners. This is a necessary business requirement to justify the investment of time and capital. A properly prepared business valuation provides management with insightful information that helps identify company strengths and weaknesses that affect value, allowing management to more effectively focus its energies in places that really count. A business valuation, prepared periodically, also serves as a measurement tool that helps owners evaluate overall progress towards goals and management effectiveness.