Knowing the value of a business is important to anyone who has an ownership interest in a company. Valuing a business is often overlooked until the last minute. At this point, the business owner realizes how vital a valuation is for making important business decisions. Business valuations play a major role in facilitating the accomplishment of satisfying the objectives of business owners in various situations. Some of the major reasons for getting your business appraised are discussed below.
When a Valuation is Crucial
1) Determine Gift and Estate Taxes: When the owner of a business transfers an interest in a company, either as a gift or at death, the IRS requires a valuation to be done in order to access the proper estate and gift taxes. The objective in the valuation process is to minimize the tax burden.
2) Fair and Enforceable Buy-Sell Agreements: Buy-Sell agreements are used in businesses to provide for liquidating the interest of a withdrawing or deceased shareholder. Under this type of an agreement, it is important for both parties to receive a fair and equitable value.
3) Buying and Selling Shares in a Company: Many times the company or a stockholder may wish to buy or sell some shares. A sound valuation can ensure a semblance of fairness to all parties involved.
4) Implementing an Employee Stock Ownership Plan (ESOP): An ESOP is a form of retirement plan that enables employees to own an interest in a company. This type of ownership is usually established through investing the company’s stock into an Employee Stock Ownership Trust (ESOT). When an employee retires or dies, their interest is either paid or transferred to his decedents. The value of the stock must be determined annually for these purposes.
5) When a Shareholder Wants to Dissolve Their Shares in the Company: When a shareholder wants to leave or “disassociate” themselves from the company, the ability to arrive at an equitable price is vital in resolving the issue.
6) When a Divorce Occurs: In the event of a divorce, the value of the business itself is required for a property settlement. Sometimes both parties will agree to an independent appraiser. More commonly, however, the parties will each hire their own experts and the matter will either be settled or decided in a court of law.
7) Mergers or Acquisitions: When a company merges with another, the shareholders of the merged company must be paid either cash or stock of the acquiring company. In this situation it is essential for both companies to be valued.
8) Compensatory Damages Cases: In lawsuits involving breach of contract, loss of business opportunity, antitrust, condemnations, or other legal issues, the business appraiser must provide expert testimony to aid the court in reaching a reasonable value to justify any damage awards.
From this discussion, it is easy to see why the need to hire a competent business appraiser is essential. If we wait until after these events occur to determine the worth of a business interest, we put ourselves at a major disadvantage. Knowing the worth of your company can facilitate business decisions, minimize tax burdens, and establish a fair value for many purposes such as a divorce settlement or buyout price. The ability to know your company’s worth changes the old cliché from “what you don’t know, can’t hurt you” to “what you don’t know, can hurt you. If you have any questions about having your business valued please feel free to contact Bart, the valuation expert, at The Center for Financial, Legal & Tax Planning, Inc.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors