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Business Valuations

Business Valuations
If you want to sell a car, a boat, or even an Egyptian mummy mask, you can just go on e-bay and quickly learn what the market will bear. But if you’re selling your business, assigning it a reasonable value is a little more involved. You’ll need a business valuation expert who can consider a variety of factors, including assets, cash flow, and market position.
Knowing what your business is worth can be important regardless of whether you’re putting it on the block. For example, you might need to establish the company’s value for a buy-sell agreement you strike with your partners, so that you can determine how a buyout would be funded. If you establish that it’s a $3 million business, say, and there are three partners, the agreement might call for each to have a $1 million life insurance policy and for the death benefit to buyout the heirs of each partner.

 Business valuations are also commonly needed for:

  • Filing estate or gift tax returns, if all or part of a business has changed hands
  • Meeting federal requirements on pricing employee stock options
  • Raising capital
  • Valuing intangible assets such as patents, software, or customer lists
  • Divorce settlement

“Every valuation is different, and there are several ways to determine what a business is worth,” says Kevin R. Yeanoplos, chair of the business valuation credential committee for the American Institute of Certified Public Accountants. The income approach, which measures value in terms of cash flow, is the most common. Other methods may be used depending on the relative importance of a business’s assets, cash flow, or market position.

Regardless of the appraiser’s approach, you’ll need to provide a range of documents and data, including:

  • Accurate financial statements
  • Income tax returns
  • Owner’s benefits (discretionary expenditures that benefit the owners)
  • Marketing materials
  • Current and projected budgets
  • Buy/sell agreements or other documents that stipulate a value for the business
  • Organizational documents
  • Corporate minutes
  • Lists of competitors and suppliers

It’s also important to let the valuation expert know about any special circumstances that may affect your company’s value. Is there a non-compete agreement to keep your best salesperson from walking off with half of your clients? Do you get most of your business from one or a few clients? Such factors could make your business worth less or more to a potential buyer.

 Different appraisers may come up with different values for your company, of course. But ideally, a second appraiser, looking at the same facts about your business, would come to nearly the same conclusion. While a lowball appraisal might be helpful in some cases—for example, if you use it to determine gift tax liability—you won’t benefit if the IRS successfully challenges it.

 To find an experienced valuation expert, look for these credentials: “Accredited Senior Appraiser (ASA),” which requires 10,000 hours of experience; or “Accredited Business Valuation (ABV),” which is endorsed by the AICPA and requires the appraiser to be a CPA. You can also contact our office to speak to an experienced professional.