Business valuation issues Featured

7:25am EDT October 21, 2004

Business valuations are an important aspect of transferring ownership of a closely-held business. Whether buying or selling a business, valuing assets during a divorce or gifting to the next generation, an accurate business valuation can save or make you money.

When selling or purchasing a privately-held company, sellers look to maximize their return at a value based on a rose-colored future. Buyers want to purchase at a discounted value based on the business's weaknesses. The right business valuator helps bridge the gap between buyers and sellers, provides a thorough understanding of the company's real value and structures the transition to take maximum advantage of the opportunity.

In divorce situations, ownership of a business is often the largest asset to be settled. Proper valuation and structure are vital to whether the owner(s) are able to sustain the business. The other side may have ulterior motives to inflate value or hide assets.

It is critical that the final agreement includes a comprehensive understanding of the real value of the business and the amount of cash it actually generates, and that it leaves the most after-tax cash possible for each side. An objective certified appraiser is essential in arriving at a fair market value for the business, as well as potentially providing expert testimony when the value is widely disputed.

When planning for gifting and inheritance, a certified valuation enables noncontrolling (less than 50 percent) transfers of closely-held ownership interests to claim relatively large valuation discounts recognized by the IRS. Although discounts reduce potential estate and gift taxes, they are sometimes challenged by the IRS in tax courts. Therefore, the use of a credentialed valuation expert can minimize IRS exposure while taking the maximum discounts available.

To maximize opportunities when transferring a business, often a once-in-a-lifetime experience, turn to specialists to significantly increase your returns.

Source: Roger Gingerich, CPA, CVA, Skoda, Minotti & Co., (440) 449-6800. Reach him at rgingerich@skodaminotti.com.