Six Reasons for a Business Valuation

Reasons for a Business Valuation

As a business owner, it is understandable to be hesitant about paying for non-essential professional fees. However, obtaining a certified professional business valuation can actually help you avoid potential issues with the IRS and maximize the value of your life’s work. Here are six reasons why it is a smart decision to secure an independent business valuation:

Reason One

To receive the full, fair value for your ownership interest in the event of a transfer to a sophisticated buyer: It is common for outside buyers to determine the worth of a business before acquiring it. As a business owner, it is important to do the same in order to ensure that you are receiving the full value for your ownership interest. A certified professional business valuation provides a reliable and accurate assessment of your business’s worth.

Reason Two

To determine if your business is worth enough to support your desired retirement lifestyle: Knowing the value of your business is crucial in determining if it can provide the financial support you need during retirement. A professional valuation helps you understand the true worth of your business and whether it meets your financial goals.

Reason Three

To understand that business value is relative and can vary based on the purpose and conditions of the transfer: The value of a business can vary depending on the reason for transferring ownership and the specific terms and conditions of the transfer. For example, the value of a business being sold to an outside buyer may be significantly different than the value established for a transfer to key employees over time or a gift to children. A certified professional valuation expert is trained to understand these nuances and provide an accurate assessment of value.

Reason Four

To motivate and retain key employees through incentive programs that are based on accurate business value: Incentive programs, whether they are cash- or stock-based, often use formulas that link the size of a bonus to the growth in business value. Employees will be more invested in such programs if they have confidence in the accuracy of the business value used in the formulas. An independent valuation can provide this assurance.

Reason Five

To address concerns and provide transparency for key employees during a transfer of ownership: Key employees may have concerns about the value of the business being transferred to them. Obtaining an independent valuation can help alleviate these concerns and provide transparency about the value of the business.

Reason Six

To justify discounts for minority interests and defend the value of your business before the IRS: In a transfer of ownership to key employees, it is common to initially transfer a minority interest at a discounted value in order to reduce tax liabilities for both the owner and the buyer. If the IRS asks you to justify the discount, a “rule of thumb” valuation may not be sufficient. Instead, it is important to have the valuation of a professional specialist who is able and willing to defend their assessment before the IRS.

Overall, it is important to consider the potential cost of underestimating your business’s value or defending an informal estimate before the IRS, compared to the cost of a certified professional valuation.

By | 2023-04-13T14:48:29+00:00 January 9th, 2023|Blog|