10 common events that spark the need for a business valuation
May 15, 2019
By Michael J. Oliphant, Yeo & Yeo CPAs and Business Consultants
There are many reasons why knowing the value of your business throughout its life-cycle is important. While valuations are recommended annually, several events can spark the need for a business valuation. Business valuations can help owners establish a baseline value, outline the economic value of their interest in the business, calculate a selling price, and plan for future succession. Below are ten common events that precipitate the need for a business valuation:
Lack of a Buy/Sell Agreement. Business owners should always have a buy/sell agreement, especially when there is more than one shareholder or partner in the entity. If a ‘triggering event’ such as death, disability, withdrawal of a partner, etc. occurs, it is essential to have a buy/sell agreement that values the company and can provide guidance to stakeholders. Having a buy/sell agreement allows stakeholders to talk about possible scenarios rather than forcing them into intensive litigation down the road.
Succession Planning. Business owners should always be thinking about their long term goals. When are they planning on retiring or otherwise selling the business? How much will they need in retirement? These questions will naturally move to company value as it is important to ensure the owners’ financial security upon retirement, and ensure that the company will not lose value when it changes hands.
Family Planning. If business owners have family members who will be taking over the business, will they be gifting shares of stock? If so, they will most likely need a business valuation to establish value as well as the price per share that will be the basis for the gifts.
Employee Stock Purchases. Key employees who have the ability or confidence to take over the business may want to discuss buying stocks, which can include consideration of an ESOP (Employee Stock Ownership Plan). ESOPs allow employees to purchase shares in a company’s stock, which can be held until the employee retires or leaves the company. ESOPs are required to have a valuation performed annually.
Divorce. When a business is involved, a valuation is usually required to determine the division of marital assets. In the event of a divorce, business owners typically work with attorneys and CPAs to evaluate the company and divide the company’s assets and liabilities between the parties.
Death. In the event of a shareholder or business owner’s death, a valuation will most likely be required to establish fair market value. Also, consideration should be made if an estate tax return is required. CPAs can determine the value of the gross estate, find any applicable deductions and establish a final taxable estate value.
Buying a Business. For those who might be expanding or purchasing additional businesses, CPAs can help. Experienced CPAs and business advisors can evaluate prospective companies and determine whether or not the value is in line with the purchase price as well as assist with strategic growth planning.
S-Corp Conversion. Converting from a C Corporation to an S Corporation can have a significant impact on the fair market value of a business and consequently its taxable value. If business owners are considering switching, CPAs can conduct a business valuation and establish a company’s value at the conversion date.
Baseline Value. Establishing a baseline value for a company is important for every stage of business. Having a baseline value gives owners a starting point for setting goals and growing their business, and allows owners to develop ways to increase value as part of their exit planning strategy.
SBA Loan Financing. Small Business Loans can help business owners grow their business and pursue new opportunities. SBA funding requires a business valuation when the loan is greater than $250,000.
Having your business valuated paves the way for your company’s continuing success and builds a solid foundation to retire, exit or otherwise transition away from your business when the time is right.