Top 10 Reasons for a Business Valuation
Written by Michele Leppard
A common question among business owners today is… ‘why do I need a valuation?’ In today’s blog, we delve into 10 common reasons why business owners may need valuation.
1. Selling Your Business
Generally the most common reason for a valuation is the potential sale of a business. A valuation analyst examines economic factors, industry research and financial standings to assess the value of the business for a potential buyer. Unfortunately, there is no ‘blue book’ used to determine a business’ market price, therefore a valuation is needed to establish a fair estimate of value, before jumping into the sales process with a blind eye.
2. Estate Planning or Gifting
Some business owners, need to know the value of their business for estate planning purposes and taxes. What can you do to prepare and possibly reduce the likelihood of estate taxes?
Will you be gifting your business to a family member? Business that are gifted need to be assigned a value for federal tax purposes, as well. Gift taxes are required on the transfer of property from one individual to another, while receiving nothing or less than full value in return.
3. Divorce
Are you and your spouse going through a divorce and (one or both of you) own a business? Couples that are going through a divorce and own all or part of a business will inevitably be required to obtain a business valuation to determine the equitable distribution of assets.
4. ESOP’s
Do you offer ‘Employee Stock Ownership Plans’ to your employees? ESOPs give employees a share of company ownership, but are basically just retirement plans that encourage employees to do what’s best for the company. These shares must be fairly priced and valued annually for tax purposes.
5. Charitable Donations
Have you ever thought about donating a part of your business to charity? Some business owners choose to donate a portion of their company to charity, therefore a business valuation is required to determine the amount of your tax deduction.
6. Business Strategy
Are you looking to drive up your business value? A baseline valuation should be your first step in this process, in order to determine the current value of your business. A baseline valuation helps pave the way for a comprehensive business strategy, which can help maximize value, increase shareholder value and set the business up for an upward facing future.
7. An Additional Business Partner or Shareholder
Are you considering bringing on another partner? If so, a share value should be calculated in order to determine how much the business is actually worth. A valuation analyst will conduct a thorough analysis of both the current and future potential of the business, to determine a fair estimate.
8. Expanding the Physical Size of Your Business
Are you expanding the physical size of your business? If you are looking for a bank loan to fund the expansion, than the bank may require a business valuation from a third-party analyst. The valuation helps the loan officer make a better judgment on funding.
9. Merging or Acquiring a Business
Are you merging or acquiring a business for growth? A merged or acquired business can expand your business substantially in a short amount of time. However prior to an M & A transaction, a valuation of the potential business must be established before moving forward.
10. Value Stock Options
Does your company have stock options, restricted stock or phantom stock plans? If so, than they will need to comply with IRC 409A regulations, which requires a valuation of the company’s common stock.
Although not every reason for a business valuation is included here, this Top 10 List should give you a better understanding of why a business owner may need a valuation. For more information regarding business valuations and strategic growth strategies, please call Red Maple Economics at (973) 545-2891 today. Our team has helped business owners understand the true value of their business. Let us help you, today! ***Mention this blog for a free consultation.***