December 22/29, 2014; Volume 28/Number 13
By Bart Basi
Knowing the value of a business is important to anyone who has an ownership interest in a company. Valuing a business is often overlooked until the last minute. At this point, the business owner realizes how vital a valuation is for making important business decisions. Following are some of the major reasons for getting your business appraised.
1. Determine gift and estate taxes
When the owner of a business transfers an interest in a company, either as a gift or at death, the IRS requires a valuation to be done in order to access the proper estate and gift taxes. The objective in the valuation process is to minimize the tax burden.
2. Fair and enforceable buy-sell agreements
Buy-sell agreements are used in businesses to provide for liquidating the interest of a withdrawing or deceased shareholder. Under this type of an agreement, it is important for both parties to receive a fair and equitable value for their interest in the business.
3. Buying and selling shares in a company
Many times the company or a stockholder may wish to buy or sell some shares. A sound valuation can ensure a semblance of fairness to all parties involved.
4. Implementing an Employee Stock Ownership Plan (ESOP)
An ESOP is a form of retirement plan that enables employees to own an interest in a company. This type of ownership is usually established through investing the company’s stock into an Employee Stock Ownership Trust (ESOT). When an employee retires or dies, that person’s interest is either paid or transferred to his or her descendants. The value of the stock must be determined annually for these purposes.
5. When a shareholder wants to dissolve shares in the company
When a shareholder wants to leave or “disassociate” themselves from the company, the ability to arrive at an equitable price is vital in resolving the issue.
6. When a divorce occurs
In the event of a divorce, the value of the business itself is required for a property settlement. Sometimes both parties will agree to an independent appraiser. More commonly, however, the parties will each hire their own experts and the matter will either be settled or decided in a court of law.
7. Mergers or acquisitions
When a company merges with another, the shareholders of the merged company must be paid either cash or stock of the acquiring company. In this situation it is essential for both companies to be valued.
8. Compensatory damages cases
In lawsuits involving breach of contract, loss of business opportunity, antitrust, condemnations or other legal issues, the business appraiser must provide expert testimony to aid the court in reaching a reasonable value to justify any damage awards.
If you wait to determine the worth of a business interest, you put yourself at a major disadvantage. Knowing the worth of your company can facilitate business decisions, minimize tax burdens and establish a fair value for many purposes, such as a divorce settlement or buyout.