Your Closely-held Business —
Finding Its Value

If you are like most business owners, your business makes up most of your net worth. When you think about selling or otherwise transferring your business interest, it is important to know the value of the business.

Options for Lifetime Transfer

You have numerous alternatives when it comes to transferring your business. Perhaps you plan to retire and transfer ownership to a family member. Or, perhaps, you will look to sell your interest to an outside party. Or you might decide to sell your ownership interest to your employees through an Employee Stock Ownership Plan (ESOP). In some cases, a life event — a divorce, for instance — might require a transfer of part of the value of your interest. Any change in your ownership (including through a merger, acquisition, or buy-sell agreement) will require a reliable value for your interest.

After all, you don't want to sell your business for less than it is really worth. An accurate valuation lets you negotiate realistically with buyers. Misunderstandings are minimized and time saved.

Transfers by Gift or Will

If you someday transfer your business through a lifetime gift or at your death, having a realistic and accurate value for the business will ease the calculation of gift and/or estate taxes. If your death is unexpected, a valuation can be even more important. Control of a family business can be lost because assets must sometimes be sold to satisfy estate-tax obligations. With accurate advance knowledge of the worth of your business, you may be able to use life insurance or other funding strategies to assure that your estate will have sufficient cash to pay estate taxes.

Determining Value

No standard method exists to determine value because each business is different. But valuation professionals and the IRS typically use similar factors when they compute the value of an operating closely-held business. These factors include the company's:

• Nature and history
• Economic outlook
• Annual budget, sales history, and sales projections
• Financial condition and book value
• Capacity for earnings
• Ability to pay dividends
• Previous stock sales and block size being valued

The general economic outlook may also be a consideration, as well as the prices of stocks of similar companies that are publicly held.

Usually, valuation professionals examine a combination of the above factors and use mathematical formulas to determine an appropriate value. But business valuation can be more of an art than a science. A factor that may control the valuation of one business may not be nearly as important when valuing another company in a different industry. When determining valuation, each closely-held business is unique.

Documenting the Value

Any valuation report you receive should be both well-documented and comprehensive. You should be able to rely on your valuation professional for full support if any question is raised about the valuation of your business. That support should extend to reporting to the other owners and defending the valuation in court or before the IRS.

And once you obtain a valuation, you should update it periodically. Significant changes to your business can easily affect its value.

We Can Help

Our professionals have years of experience working with owners of closely-held companies. We can use our skills to help determine a business’ value, whether the business is large or small, simple or complex. We would welcome the opportunity to put our knowledge and experience to work for you. Contact us today.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.