Valuation helps a business owner get a picture of the company’s strengths, weaknesses and progress. To optimize business value for a future exit event, planning is essential, whether it is based on a formal valuation or simpler consulting services.
Business valuations are critically important at major business events such as the sale, transfer or merger of a company. We’ve seen buyers and sellers on the other side of the deal miss the listing price or purchase price by 30% for the lack of good analysis – resulting in millions of dollars of gain for our clients!. Sometimes, it’s just smart to add a good advisor to your team.
Another reason is to avoid the appearance of conflict of interest when a transaction will be reviewed by the SEC or IRS. In the M&A arena where executives historically looked to the CPA firm or investment bank advising on the transaction to provide a value opinion, recent court rulings make the practice of using a firm that earns a contingent fee risky. FINRA Rule 2290 now requires disclosure of conflicts of interest. A company that wants a superior level of fidelity can get an independent opinion from American ValueMetrics.
Some of the common situations are:
Business ownership changes can be for a purchase or sale, investment, separation or marital dissolution (spouses are practical business partners in many states). In the case when federal grants are used for certain projects, and intellectual property is created with non-profit funds and research, the sale or licensing of these intangible assets to other parties – universities, government agencies or private sector companies – must be premised on sound and supportable valuation practices.
Tax reporting covers a broad arena which can include allocation of purchase price, stock options and retirement plans. It wasn’t too long ago that the IRS accepted valuations for tax purposes on their face, but abuse of tax-related business valuations led the IRS to create imposing business valuation standards. When it comes to valuation approaches and theory, the IRS and the Tax Courts are very sophisticated. They’ve weighed in on topics like valuation discounts for the lack of marketability of private company stock, and many other topics related to business valuation.
A valuation may also be needed to establish a basis for federal grant reimbursement. Federal government grants are sometimes coupled to the employment of certain assets in specific research or development programs. The asset value basis and its related depreciation may determine an expense reimbursement within the grant provisions.
Business disputes usually center on intangible asset values. Economic damages often need to be assessed in commercial litigation proceedings. Situations can also arise when a minority shareholder is not receiving dividends or other return on his or her investment in a closely held company; and majority owners are receiving substantial sums benefits from the company. In this type of litigation, a comprehensive valuation is a necessity.
Charitable gift and estate management require valuation on a periodic basis to provide an objective value for the owner’s planning purposes, while defensible analysis and certification of the fair market value of the business at the time of the ownership transition are required for estate tax reporting.
Value is what people are willing to pay for it.