There are many reasons to conduct a business valuation. Some valuations are pretty straightforward while others can be quite complicated. If there is a good possibility that the valuation will be challenged on legal grounds or by the IRS, it is often best to have the valuation performed by a qualified appraiser.
That said, I have counseled scores of clients on business valuation issues and I have come to the conclusion that there are five primary reasons for conducting a business valuation.
- The first and clearly the most popular reason for conducting a business valuation is related to some form of merger & acquisition (M&A) activity. Most of the time, it is the buyer that is attempting to value the business they are considering buying.
- Another reason to conduct a business valuation is related to estate planning. When a family-owned business is passed on, there may be estate and gift taxes involved. The American Tax Relief Act of 2012 set the exclusion of estate and gift taxes at $5 million with a maximum of 40% estate tax above this threshold.
- As new members enter and exit a closely held business, there is often a need to establish shareholder or membership values for some form of buy/sell arrangement.
- Intergenerational transfers of ownership often involve transferring a mix of assets to several parties. Allocating them among the parties requires an understanding of the value of the asset.
- Finally, some owners choose to covey their ownership to their employees through an Employee Stock Ownership Program (ESOP), which requires credible evidence of the value of the business.
Do you need to perform a business valuation?
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