What is your business worth?
If you need to know the answer to this question, then you may need a business appraisal (i.e., business valuation).
Some of the reasons for performing a business valuation include:
Marital Dissolution - In a marital dissolution, most of a couple's assets and liabilities are valued, regardless of whether a state follows equitable distribution or community property rules. If one of the assets included in the marital estate is an interest in a closely held business, then it is typical to have the business valued. Some states exclude goodwill associated with a professional from the marital estate. In such cases, a valuation may be necessary to compute the professional goodwill component.
Buy-Sell Agreements - A buy-sell agreement allows partners or stockholders in a closely held business to acquire the interest of another partner or stockholder who withdraws from the business. The agreement may contain a designated price or formula to establish the value at which the remaining owners will pay to acquire the interest, and payment terms and conditions of sale are generally provided. Typically, the price formula is updated regularly. Such agreements also frequently establish a transfer price in the event of death and/or disability. Business owners often seek the advice of a valuation analyst to assist in determining the most appropriate valuation formula.
Stockholder Disputes - Because many states allow a corporation to merge, dissolve, or restructure without unanimous stockholder consent, many disputes have arisen because minority shareholders have experienced a negative impact. Dissenting stockholders have often filed lawsuits to allow their shares to be valued as if the action never took place. In such cases, the value of the shareholder's interest immediately before the change must be determined.
Income Taxes - When a C corporation elects to be taxed as an S corporation, any assets (including goodwill) sold within a certain number of years of the election may be subject to a built-in gains (BIG) tax. The BIG tax computation is based on the difference in the asset's value on the election date vs. the sale date. Therefore, it is imperative to have documentation of all asset values (including goodwill) at the time of conversion from C to S.
Gift & Estate - The valuation of a closely held business is important to estate planners as they consider the effect of the unified estate and gift tax credit on lifetime transfers of property. It is equally important to have a defendable position of value for a business at the death of the owner for determining the amount includable in decedent's gross estate.
Charitable Contributions - Owners of closely held business enterprises may wish to give all or part of their interest in a business to a favorite charity. Current tax law requires a donor to have an appraisal which supports the deduction for gifts of property in excess of $5,000.
Allocation of Purchase Price - Years ago, both the purchaser and seller could determine their own asset values and treat the purchase and sale of the same business differently on their respective tax returns. The buyer didn't want to purchase goodwill because it was not tax deductible, and the seller wanted to sell goodwill because it was subject to a lower capital gains tax rate. However, the Tax Reform Act of 1986 set forth requirements such that when a business is sold, a valuation must be performed to support the allocation of the total selling price to the component parts. Thus, the buyer and seller must now report the transaction consistently on IRS Form 8594. When the price allocation is complex or the parties do not agree, it may be wise to enlist the services of a business valuation specialist.
Mergers, Acquisitions, Reorganizations, Spin-offs, Liquidations, and Bankruptcy - Business valuations are frequently performed when two companies merge, when one company acquires another, when a company's capital structure is reorganized, when a company splits up, or when a company enters bankruptcy in liquidation or reorganization.
Damages Litigation - Many court cases involve damages. Some cases relate to compensation sought for patent infringements, illegal price fixing, breaches of contract, lost profits, or lost business opportunities. Some cases relate to lender liability, discrimination, and wrongful death actions. In such cases, the valuation analyst might perform hypothetical valuations of a company to determine the amount of damages resulting from a loss of business value. These engagements usually require two valuations (i.e., the present company value and the hypothetical value had the event not occurred), and the difference between the two values typically represents the measure of damages.
Insurance Claims - Cases involving risk insurance claims often focus on the loss of income because of a business interruption and the value of such separate business assets as inventory and equipment. A valuation may be required to support the owner's or the insurer's position.
Eminent Domain Actions - An eminent domain action takes place when government exercises its right to take over property and compensate the owner for any resulting reduction in the value of the property. When a business is adversely effected by an eminent domain taking, an expert appraisal may be necessary to support the business owner's claim or the government's offer.
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Services We Offer:
Regardless of the purpose of your valuation, we would be happy to discuss your situation with you and offer possible solutions. Depending on your circumstances, we can provide a formal Valuation Engagement, a less formal Calculation Engagement, or some other valuation related services.
Valuation Engagement - The valuation engagement is a formal process whereby we apply a full-blown approach and document our results in a report which contains our conclusion of value. This engagement is typically the most costly and requires that we take the following steps:
1. Define the appraisal engagement in writing.
2. Gather the necessary data to perform the engagement.
3. Analyze the data gathered.
4. Estimate the value of the interest being appraised.
5. Write a report to communicate the value.
This approach is most often used when the appraisal is required to meet a burden of proof to an outside third party. When you opt for the valuation engagement, it is imperative that you work with a qualified, reputable valuator to give you the best chance of meeting your burden.
Calculation Engagement - A calculation engagement occurs when the client and valuator agree to specific valuation approaches, methods, and procedures. Because it is so flexible, the resulting calculation of value may be documented orally or in writing. This approach is also typically a lower cost to the client because less work is required. The Calculation Engagement is useful when you need an 'idea' of what your business is worth, but you are not under any burden of proof to an outside third party. It is also useful as a second opinion to determine whether another valuator has been reasonable in his or her approach.
Other Engagements - We are often hired to critique the work of another valuator in litigation support. Because we have a wealth of experience in this area, we may be able to discover fundamental flaws which overstate or understate value. We can then serve as an expert witness for our opinion and/or help your attorney prepare for cross-examination of the opposition expert.
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| Member of NACVA since 2001 |
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