Valuation Scenarios

Misconception: Business Valuations are for Selling a Business Only

Many business owners falsely believe that they only need a business valuation when they are preparing to sell their business.

Valuations of businesses, business ownership interests, securities, or intangible assets (hereinafter collectively referred to as business valuations) may be performed for a wide variety of purposes including the following:

1. Transactions (or potential transactions), such as acquisitions, mergers, leveraged buyouts, initial public offerings, employee stock ownership plans and other share based plans, partner and shareholder buy-ins or buyouts, and stock redemptions.

2. Litigation (or pending litigation) relating to matters such as marital dissolution, bankruptcy, contractual disputes, owner disputes, dissenting shareholder and minority ownership oppression cases, and employment and intellectual property disputes.

3. Compliance-oriented engagements, including (a) financial reporting and (b) tax matters such as corporate reorganizations; S corporation conversions; income, estate, and gift tax compliance; purchase price allocations; and charitable contributions.

4. Planning oriented engagements for income tax, estate tax, gift tax, mergers and acquisitions, and personal financial planning.

In recent years, the need for business valuations has increased significantly. Performing an engagement to estimate value involve special knowledge and skill.

Below are some of the more common reasons people request valuations:

Marital Dissolution (Divorce)

Your business may likely be your largest joint marital asset and the most complex to value. A business valuation will either be court appointed or voluntarily engaged, to facilitate a friendly and fair distribution settlement.

Estate & Gift Tax

If you have a partnership / LLC interests then the gifting of closely held stock necessitates an independent valuation, to provide an objective analysis as to the fair market value of the business at the time of the ownership transition.

Shareholder and Partnership

Buyouts and Disputes If you or a partner/shareholder decide to leave the partnership or offer an equity position to someone else then a proper third-party valuation can assist in a quicker, fair and amicable transaction.

Buy-Sell Agreements

Many buy/sell agreements require a business valuation so that the business ownership will be transferred at fair market value. Agreements between partners or shareholders should be based upon an independent business appraisal rather than a rule of thumb formula because formulas may yield an unrealistic values.

Sub-chapter S Conversions

If you’re planning to convert from “C” to “S” or “LLC” corporate status, you should have a valuation done “as of” the conversion date to help with tax calculations for the IRS. If your company is sold prior to the ten year holding period, there is a tax due on the built-in gain of value from the date of conversion.

Bankruptcy

Bankruptcy is a legal admission of the inability of an individual or company to meet and pay their liabilities. Therefore knowing the bankruptcy value of your business and its assets is critical to the restructuring process and valuations are influential in maintaining the confidence of your creditors’ committee or trustee.

Personal Financial Management

Your business represents a typical owner’s single most valuable asset. Despite this, most business owners have no realistic concept of the true market value. A business valuation empowers you to make informed critical decisions, such as proper timing to pursue an exit strategy.

Commercial or Project Financing

Increasingly local banks and lenders will request an independent market valuation prior to approving a small business loan or credit line. A business valuation is a instrumental tool to include in a loan package when approaching lenders to negotiate rates and loan terms.

Financial and Tax Reporting

Certain financial & tax reporting situations require an independent valuation. When your company offers and issues stock options, or transfers or sells equity interests, a valuation is required to report related compensation expense and the recipients to accurately report income.

Call Sterner Consulting for Valuation Assistance

Contact Sterner Consulting for more information on obtaining an accurate valuation of your business or other business-related assets.