There are many reasons why a business owner or individual may need to know the value of a business. The typical standard of value utilized is fair market value. The fair market value standard consists of an independent buyer and seller having the requisite knowledge and facts, not under any undue influence or stressors and having access to all of the information to make an informed decision.
Below are 25 common reasons that a business owner or individual may need a business valuation:
- To set a basis of value for a business when no valuation has been previously performed.
- To understand the value (worth) of the business.
- To set a base line value for the business and develop a strategy to improve the profitability of the business and increase the value of the business for an exit strategy.
- To evaluate an offer and negotiate a strategic sale of a business.
- To determine the annual per share value of an Employee Stock Ownership Plan (ESOP).
- For exit strategy planning purposes.
- To value a portfolio of IP– patents, trademarks, copyrights, proprietary processes, etc.
- To justify the per share equity value in a company for annual shareholder meetings.
- To identify weaknesses in a business to refocus the operational efforts to improve profitability and the bottom line.
- For shareholder or partnership disputes.
- For shareholder or partnership investments or buyouts.
- To determine the potential built-in-capital-gains tax in a conversion from a C-Corporation to an S-Corporation.
- For buy-sell purposes and funding the agreement.
- To obtain bank financing or alternative investment.
- For financial reporting purposes – to allocate the purchase price to appropriate equity classes and determine if there is any goodwill impairment.
- To allocate the purchase price after an acquisition of a business.
- For estate tax reporting purposes of a decedent.
- For gift tax planning purposes – transferring an interest to family members, donation to a charity, transfer to an intentionally defective grantor’s trust, etc.
- To determine the value of the assets in a marital dissolution action.
- To value stock options, restricted stock or phantom stock plans that a Company has in place to comply with IRC 409A.
- To value a business for a business bankruptcy.
- To determine the IP value in a business.
- For litigation support purposes, to determine economic damages, lost profits, uncover fraud or value of a business in a shareholder or partnership dispute, IP damage from infringement or section 2000 minority shareholder action.
- To determine the intrinsic value of a business and assess whether it is different from the fair market value of the business.
- To identify whether the business is growing, stagnant or declining in value to restructure the business.
This list is not exhaustive. There are many other reasons that a business valuation may be needed.
A business valuation is a complex financial analysis that should be undertaken by a qualified valuation professional with the appropriate credentials. Business owners who seek a low cost business valuation are seriously missing out on the important benefits received from a comprehensive valuation analysis and valuation report performed by a certified valuation expert. These benefits help business owners negotiate a strategic sale of their business, minimize the financial risk of a business owner in a litigation matter, minimize the potential tax that a business owner or estate may pay in gift or estate tax situation as well as provide defense in an audit situation.