Top 10 Reasons for a Business Valuation
A business valuation is the process used to evaluate the economic value of the owner’s interest in their business. While many business owners only receive a valuation when absolutely needed, it can be very beneficial to be proactive with business valuations, especially when planning for the future.
Here are the top 10 reasons for a business valuation:
1. Buy/Sell Agreements
A buy/sell agreement is established to determine what will happen to a partner’s share in a business if they leave the business or pass away. A business valuation can help prevent future disputes and help determine a method to calculate the amount any remaining owners would need to pay to acquire the interest the previous owner held.
2. Exit Strategies/Succession
When planning on selling your business, it is vital to have an accurate base line value. You can also develop a strategy to improve the profitability to increase the value.
3. Sales, Mergers, and Acquisitions
When companies are planning to buy, merge, or acquire another company, receiving a business valuation can ensure you are negotiating a fair price for the business. For an acquisition, only one company may be required to obtain a valuation but, in a merger, typically parties may require a valuation.
4. Estate Planning and Gift Tax
Knowing the proper value of your business is a crucial step to correctly fund a future estate tax liability. A business valuation can also provide the necessary guidance to fulfill the terms in an individual’s will.
5. Tax and Financial Reporting
In any business transaction, both the purchaser and the seller need to record an accurate record of the sale. Owners can be penalized for an incorrect or inconsistent allocation of purchase price.
6. Insurance Planning
“Key Person Insurance” is a life insurance policy that is purchased by a company on behalf of a vital key executive’s life, making sure the company is the beneficiary of the plan. A proper valuation can determine the key person insurance policy.
7. Employee Stock-Ownership Plan (ESOP)
A valuation must be performed every year for an ESOP (Employee stock-ownership plan), which is an employee benefit plan that gives workers ownership interest in the company. To comply with IRS requirements, an accurate valuation must be determined to establish a fair stock price.
8. Shareholder and Partnership Disputes
There are many types of disagreements that may arise between partners or owners, between each other or from an outside party like during a merger. A business valuation can be a crucial part of the settlement process of ownership interest.
9. Funding/Small Business Administration Loans
It is common for banks and other financial institutions to require a business valuation to approve a loan, knowing that the business can support it. A valuation can also be used when negotiating with venture capitalist or other potential investors to help raise capital.
10. Marital Dissolution (Divorce)
When dealing with a division of assets, a valuation is required to ensure fairness. Many times, this valuation is required by a judge through a trial.
With all the reasons above, it is important to hire a professional to ensure an accurate business valuation. Our trained valuation analysts have the qualifications and experience to value a business for a variety of purposes, including the purchase or sale of a business, divorce of an owner, estate and gift matters, business and contractual disputes, eminent domain condemnations, and to assist in financing.
Contact our Palm Beach Gardens or Miami offices today to learn more!