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Top 10 Reasons You Might Need a Business Valuation

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Your local assessor’s office has a record of your house’s value. Kelly Blue Book has a reference of ranges of retail value for your automobile. There are numerous of other resources out there that provide information around the products we buy, the pricing of mutual funds in our retirement accounts as well as the best values for vacation packages, households good and even universities.

So, why is it that business owners, especially small business owners, do not know the fair value of their business?

We have found that most business owners do not want to spend the resources (i.e., time and money) to hire a professional unless there is an eminent need. And most often when there is an eminent need to obtain the feedback from an expert business appraiser, this business owner is still reluctant to go down this path.

The prospective sale of the company is usually the obvious reason for a business appraisal but we have come up with our list of Top 10 Reasons You Might Need a Business Valuation.

Top 10 Reasons You Might Need a Business Valuation:

1. To Inform Decision Making

An owner may want a business appraisal to help decide the near- and long-term strategies. While the investment in an appraisal is meaningful and not undertaken lightly, an owner at an inflection point in the business or his/her personal life may need the information to decide whether to sell, expand, gift, strategically plan or go in another direction. It may be an action that leads to growth and future success (business and personal).

2. Exit Strategy Planning/Selling a Business

If you are planning to sell your business, it is a great idea to set a baseline value for the business and develop a strategy to improve the profitability to increase the value going into a future liquidity event.

When you are ready to go down the path of a liquidity event, what should the purchase consideration be? This depends on what your business is worth when you put it on the market. At the very least, an appraisal can help you make an informed decision about whether to sell and what a reasonable asking price may be to a potential buyer.

3. Transaction Planning (i.e., capital raising)

How much should an investor pay for an interest in your company? It depends on what the company is worth. In order to set a price for an investor to buy into your company, a business valuation must be made.

While value can be set using certain key metrics (e.g., a multiple of earnings), an appraisal may be preferable (e.g., if you’re bringing in investors who are acquiring a substantial interest in the company).

4. Estate Planning

Whether you need to do tax planning for your estate depends in part on what your business is worth. If the value of the interest in your business, plus the value of your other assets, exceeds the federal estate tax exemption amount ($11.4 million in 2019), you likely want to work with tax professionals to craft a plan that minimizes your estate’s tax exposure and maximizes what heirs will keep after tax.

Even if your estate is not large enough to raise federal estate tax concerns, the laws in your state may still be a concern. For example, Massachusetts’ and Oregon’s exemption amount is $1,000,000 while Rhode Island’s exemption amount is $1,516,719. Estates above these amounts may be taxed, so planning is necessary.

5. Granting Stock Options (IRS Section 409a)

IRC section 409(A) requires formal valuation work in order to grant stock options and other forms of nonqualified deferred compensation. Under IRC section 409(A), if a company issues stock options to employees at a strike price below fair market value, it is expected that the recipient will recognize income. Failure to comply carries significant costs in the forms of penalties and taxes.

6. Making Charitable Donations

You may want to benefit a favorite charity using your business as the source of the gift. You don’t have to be a public corporation to do this. The IRS requires donors and charitable organization to supply certain information to prove a taxpayer’s right to deduct any charitable contributions. Certain appraisal requirements apply if you donate an asset of property worth more than $5,000. The business/asset appraisal must be made by an appraiser no earlier than 60 days prior to the contribution.

7. Fairness Opinions to Support Transactions

When you are negotiating a merger, negotiating a management buyout, undertaking certain types of corporate reorganizations, tax planning as well as legal contracts requiring a value to be set on your business or business interest. A fairness opinion involves a total review of a transaction from a financial point of view. The advisor (e.g., investment bank, business appraiser) examines the pricing, terms and consideration received in the context of the market for similar companies. The advisor opines that the transaction is fair, from a financial point of view and from the perspective of minority shareholders.

8. Creating an ESOP/Annual Per Share Value of ESOP

A valuation may be used to set-up an ESOP, and many firms that operate as ESOPs perform a valuation annually, to measure milestones, productivity or establishing a value for entry or exit from the ESOP (in the form of the company’s ESOP shares).

While publicly-traded companies can use their market values for the ESOP, privately-held corporations need an appraisal to know how much they can deduct for the contribution of shares to the plan and how much employee-participants can receive annually.

9. Shareholder Transfers/Partnership Change/Buy-Sell Agreements

If you are in a partnership or LLC, a buy-sell agreement between principals can help avoid future disputes. A mutually agreed upon value is a starting point for an agreement that is acceptable to all parties.

Shareholder buyouts occur frequently in closely held businesses because of retirement, new partner admittance, death, divorce or disagreement among shareholders. These buyouts can be costly to parties who feel they receive too little or pay too much for the transfer of shares. Even when a buy-sell agreement exists, it may be prudent for the shareholder(s) to engage the services a valuation professional. A business valuation helps mitigate the risks associated with a shareholder buyout by having a thorough and supportable valuation analysis with a report prepared which outlines the factors affecting the value of the business and conclusion of value.

10. Litigation

The need for a business appraisal arises in a variety of types of litigation from domestic relations to minority shareholders suits, from disputes over the scale of a business to taxation and estate litigation. In all of these instances, the basic issue is the same: how much is the business or business interest worth?

We are more than happy to help with any valuation advisory services, or answer any questions for you about the above information. If we can help in any way, please contact us through the website, or email [email protected].

For more information, click here to download our Valuation Advisory Services Executive Summary.

About The Author:

Christian Dougherty headshotChristian Dougherty

Managing Director, Valuation Advisory Services

20+ Years of Experience

[email protected]

Disclosure

Objective Capital Partners is a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. The executive team has a unique combination of investment banking, private equity, and business ownership experience that enables Objective Capital Partners to provide large enterprise caliber investment banking services to companies with annual revenues up to $500MM. Services include sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. The firm uses a proprietary process to work to achieve maximum company valuation, premium pricing, and high client satisfaction rates post-sale. The firm’s industry expertise is focused on 5 verticals including healthcare, life sciences, business services, technology, and consumer products. Additional information on Objective Capital Partners is available at www.objectiveibv.com.

This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.

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