Essential Uses for a Business Valuation

Essential Uses for a Business Valuation

Why should you consider a business valuation?

For an owner of a privately held business, the value of the business is a very important component of the owner’s personal, financial, and corporate planning and can be critical if a dispute arises. Below is a description of typical situations where a valuation is essential:

1. Estate Planning and Gift Tax Planning

Estate planning can be difficult for an individual and is especially complex when a privately held business is part of the assets owned. When considering estate and estate tax planning, a proper valuation can help determine an equitable distribution to each beneficiary and help develop a plan for gifting to maximize annual gifts and minimize the eventual estate taxes.

2. Exit-Planning

Planning for the eventual exit of a business is important and often overlooked. The key is to understand the value of the business today and consider the potential future value under different exit options, such as selling the business to a third party or transferring the business to the next generation. The process of understanding the value today and considering future exit options can help develop a plan to maximize the desired exit for the owner.

3. Mergers and Acquisitions

In addition to, and potentially part of an exit plan, is mergers and acquisitions. The business may merge or be acquired as part of the eventual exit plan. However, the owner may use mergers or acquisitions to support growth and strategic objectives. Any time a merger or acquisition is contemplated, the key component of planning and executing a transaction is the value of the business.

4. Buy-Sell Agreements

A buy-sell agreement between owners of a closely held business can be critical to the success and financial security of a business and the owners of the business. The agreement should define the standard under which the value will be determined, and the process that is to be followed to estimate the value of the business. When creating a buy-sell agreement, the current value of the business is important to establishing the initial agreement, and periodic updates can ensure the buy-sell agreement remains relevant.

5. Management Ownership

Aligning management with the future success of the business is extremely important to achieving corporate objectives. One way to accomplish this objective is through equity ownership. This can be achieved through equity grants or profit interests that enable an executive to participate in the value appreciation above a certain amount. The starting point for an equity-based incentive plan is to estimate the current value of the company.

6. Divorce or Legal Disputes

Unfortunately, divorce and legal disputes can happen, and they can definitely be messy. The messiness is especially true when a closely held business is involved. The need for a qualified appraiser to value the business is more important than ever when faced with a legal dispute. The key is to make sure the appraiser has the proper qualifications and experience to prepare and defend the valuation.

When pursuing a valuation for any of the above reasons, it is important to have a qualified expert that is focused on helping clients achieve their financial goals.

Steve Amigone 2023 cropped

Steve Amigone Consulting Practice Leader

Steve serves as the Firm’s Consulting Practice Leader in the Winston Salem office of Bernard Robinson & Company (BRC). He is responsible for leading and driving growth, client service, and investments in seven key service lines: CFO Consulting, IT Solutions, M&A, Forensics/Valuation, Client Accounting Services, Outsourcing, and Business Transformation.  Steve will also serve on […]

The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.