Business owners, CFO’s, investors, shareholders, CPA’s, attorneys, fiduciaries and others need business valuations for many reasons. Below are some of the purposes for which appraisers prepare business valuations.
Acquisitions and Mergers
Business valuations are often performed when one company wants to acquire another, considering anticipated synergies. In a merger, each business is typically valued on a stand alone basis. Then, the two businesses are valued as if combined. This process gives each firm guidance on how much can and should be paid for the other.
Selling a Business
Sellers of businesses usually want to know the fair market value of the business before entering into a transaction. Sellers often want to know the most probable selling price before going to market.
Partnership or Shareholder Agreements
Agreements between partners or shareholders, often a buy-sell agreement, should be based on a business appraisal rather than some simple formula. Often, an appraisal is performed when a shareholder, such as a professional, is buying into a business or professional practice or when they want to sell out and move on.
Marital Dissolution (Divorce)
During a divorce, a closely held business is usually a significant marital asset. Often, an appraisal is done by an appraiser hired by each spouse however, in some cases, one appraiser is retained by both parties to prepare an objective value acceptable to both parties. Each appraisal should be totally objective regardless of which side has retained the appraiser—however, in practice this is often not the case.
Estate Planning for Gifts or Inheritance
Interests in closely held businesses can be transferred during the lifetime of the owners to minimize the estate taxes that will be due on the death of the owners. Business appraisals are typically required and must be filed with the Internal Revenue Service along with the gift or estate tax returns. Often, these reports are closely scrutinized by the Internal Revenue Service. For this reason, it is important to retain a highly qualified and experienced business appraiser to prepare the needed valuation.
Family Limited Partnerships or Limited Liability Companies
These entities are often used as estate planning devices for owners of closely held businesses including farms and ranches. Minority interests in the company or farm can be gifted to relatives or others while the owners still maintain control of the company or farm. Typically, discounts apply to the minority interests that are gifted thus saving gift and/or estate taxes. Your attorney can help you structure the entity that is appropriate for your situation. We can do the business valuation needed to quantify the appropriate discounts.
Employee Benefit Plans
Transferring a portion or all of the ownership of a business to employees is a complex area. Typically, called Employee Stock Ownership Plans (ESOP), employer stock is contributed to the plan instead of cash. Department of Labor rules and regulations apply to ESOPs. The stock must be valued by an independent appraiser annually.
Litigation Issues involving Lost Profits or Economic Damages
These types of cases need a business appraisal to establish the amount of damages that occurred. Often, the business must be valued twice. Once, at the present time and the other as if the action that resulted in the problem had never taken place. The difference represents the amount of damages.
Dissenting & Oppressed Shareholder Litigation
Stockholder disputes arise from a variety of reasons. Often, the problem is a minority shareholder that is not receiving any dividends or other return on their investment in a closely held company but watches the majority owner take huge amounts of money and benefits out of the company. In this type of litigation, a competent business appraiser and a comprehensive valuation is a necessity.
Other Reasons for Valuations
There are many other reasons for a business appraisal. Some of these include: Allocation of Purchase Price, Liquidation or Reorganization of a Business, Conversion of a “C” corporation to an “S” or SubChapter S corporation, Financing, Ad Valorem Taxes, Incentive Stock Options, Initial Public Offerings, Insurance Claims, Charitable Contributions, Eminent Domain Actions, etc.
Appraisers value businesses and intangible assets. Businesses include all types of operating companies such as service, manufacturing, distribution, retail and professional service businesses. Businesses can range from early-state technology companies to mature multi-generational family-owned and operated enterprises. Businesses also include holding companies that own real estate, cash, securities and other investments. Intangible assets generally include patents, trademarks, trade secrets and license agreements.