The most common and perhaps the best response to this question is, it depends. The valuation conclusion may well depend on the answers to a number of key questions, the most basic of which is, what is the purpose or reason for the business valuation?
This purpose may have a major impact on how the valuation professional proceeds. Following are just some of the more common reasons for a business valuation, as well as some of the strategies used in accomplishing the client’s objectives or goals.
Gift or estate tax planning
Transferring potentially appreciating assets to reduce your overall estate is a common estate-planning strategy and can be important to consider even with recent tax law changes.
The use of Family Limited Partnerships (FLPs) in this area has continued to emerge as an effective planning strategy for the reduction of estate taxes, primarily because of certain discounts that have been allowed. While the IRS continues to challenge certain aspects of this methodology, it has survived as a viable strategy.
Whether transferring to family members or to key employees, identifying the right buyer at the right price can be a tricky ordeal and should be addressed properly. Certain strategies have been developed and might include the following.
- Buy/sell or other stockholder agreements Contractually determining what happens to the stock in the company after a triggering event can help avoid shareholder disputes and solve succession planning issues early in the game.
- FLPs Again, the use of FLPs has been and continues to be an effective strategy in succession planning opportunities.
In a divorce situation, the value of the business may be one of the more significant property issues. A business valuation can assist the parties and their counsel in the property settlement process. Divorce situations are often not amicable and the business valuation can become the focus of much attention. It is not unusual for each side to retain an expert to testify as to the value of the business.
Income tax planning
Always be aware of the impact changing your corporate status could have.
- S corporation election Changing a corporation’s entity type for tax purposes can have many advantages, assuming the right attributes are present. This may save taxes on the eventual sale of the corporation and allow more flexibility for owner distributions, etc. Often a business valuation is required in assessing the risks and rewards of such a decision.
Seeking business financing
An independent valuation can provide objective evidence to the value of the ongoing business operation as well as specific tangible or intangible assets contained in the business. This may assist the lender in making additional or replacement funding available.
Mergers and acquisition
In many instances, the company owner is considering a merger or acquisition of another entity. Conversely, the owner may be considering a sale to a third party. A business valuation is an effective tool in the merger, acquisition or sale opportunity.
A business valuation can provide a relevant and reliable picture of a company’s progress, strengths, weaknesses and perhaps as a comparison to the industry. It can provide a foundation for planning that will help develop realistic strategic objectives.
Retaining a qualified valuation professional is essential. The qualified professional should possess specific training, education and experience in the area of business valuations, including one or more of the recognized certifications CVA, ABV, ASA or CBA. These certifications are the common indicators of those professionals who have attained the necessary training and education required to perform the complex valuation engagements.
Bruce G. Knapp is a director and practice leader of Doeren Mayhew Litigation Support and Forensic Services, LLC. He is a Certified Public Accountant and Certified Valuation Analyst. Doeren Mayhew Litigation Support and Forensic Services, LLC is an affiliate of Doeren Mayhew, located in Troy, Michigan, providing a wide range of professional services to middle-market companies. Contact Knapp at firstname.lastname@example.org or (248) 244-3218.