Top 10 Reasons for a Business Valuation
Business valuation is very helpful in designing and adopting planning strategies. It is therefore a good idea to review the common valuation methods to identify the right time when your business needs a valuation.
1. Succession Planning
The most common in business succession is gifting the business to the family.
The business might be sold to some other party or parties, or to the employees. This transaction will be done on the ongoing value of the business.
Sometimes the business is sold to a buyer who has some connections in the industry. This type of transaction is done at a higher rate as compared to the one given to a routine transfer to the family or selling it to the employees, or any other buyer who is not connected to the industry. This type of buyer might be planning to increase the profits and cash flow by incorporating better revenue streams.
Sometimes when a business is being sold to a strategic buyer a valuation may be done to determine the estimated value of the business.
There are plenty of free tools to get your business valued, such as, https://www.nimbo.net/en which must be used to get a high level idea about what is the worth of your business.
2. Estate and Gift Tax
Sometimes a business valuation is required to file an estate tax return to provide guidance according to the terms of the will of the decedent. Valuation of business or business interest is sometimes required to minimize estate tax in case the business is being transferred as a gift.
3. Sales, Mergers, and Acquisitions
Valuation is also needed when a company is targeted for acquisition. When another company is going to buy it for reorganizing its capital structure, to split up, or to file bankruptcy for liquidation. In the case of a merger, both parties get a valuation. These valuations might create challenging situations, to overcome this the valuation analyst calculates cash equivalents for payment.
If you are planning to sell off or merge your business in future, your in-house finance or outsourced accountants need to start managing your numbers from today to make sure your business gets valued at your desired values.
4. Buy or Sell Agreements
A valuation is also done to make a buy/sell agreement. This valuation might be necessary to ensure a proper value for estate and gift tax purposes. In a closely- held business, a buy/sell agreement allows an owner to acquire the interest of another owner if he or she decides to exit, retire, or passes away. This is done to determine the remaining owners’ price to buy or get the exiting owner’s interest. In order to keep the company’s performance updated, the valuation analyst should occasionally review this price or formula.
5. Shareholder and Partnership Disputes or Buyouts
There could be many circumstances that result in ownership disputes, disagreements, a merger conflict, business liquidation, or other similar issues. A valuation can be helpful in settlement of such situations.
6. Allocating Purchase Price
The sale is needed to be recorded correctly in a business transaction, which could be a merger, acquisition, sale, etc. A wrong allocation of the purchase price can result in an increase in the tax or penalties.
7. Marital Dissolution
In case of a divorce of a business owner, a valuation is required to divide the conjugal estate. Sometimes both of the parties hire a single valuation analyst, but often both sides obtain separate valuations.
8. Insurance Purposes
Sometimes a valuation is done to determine the value necessary to cover the business interest value. If something happens the insurance company pays this value to the family of the owner.
A business valuation is also required by the financing company to approve a loan. In such cases, the financial statements are presented at a historical cost. The valuation provides the bank with fair market value amounts that can support the loan.
ESOP is an employee benefit plan that makes investments in worker stocks. This plan provides liquidity, capital, and certain tax advantages to private business owners.
ESOP requires an annual valuation, which will determine the share price for the assignees of the ESOP plan.
These are the few potential reasons why you should get your business valuation. However, in each of these cases, it is important that valuation is done by a credential valuation expert.