Valuing a Closely-Held Business
There are many reasons why a business owner
might need or want to value a closely-held business.
(1) Planning for estate liquidity
(2) Making a gift to a family member, a friend or
(3) Properly recognizing the business worth in a
pre or post nuptial agreement or a marital dissolution
(4) Ascertaining worth for loan collateral purposes
(5) Performing a “fiscal checkup” to test the financial
health of, or trends in, the business, or
(6) A buy-out necessitated by death or disability,
at retirement, or the sale of an interest in the business
to a third party.
Here are some of the key factors (assigning more weight
as appropriate to the factors that most influence the
future financial success of the business being valued)
that must be considered:
Nature and history of the business: How risky
or stable is it? How strong is its management? How
diverse is its operations? Is it growing or shrinking?
What significant events have shaped its past or could
shape its future?
Economic outlook in general and for specific
industry: What’s happening in the general economy?
What’s happening in the specific industry?
Book value: To what extent is book value
misleading? What adjustments need to be made to properly
bring the asset components to fair market value?
Earnings capacity: What is the business future
income potential? What adjustments need to be made
for salaries, travel and entertainment expenses, non-recurring
items, potential legal or tax liabilities? Are there
shareholder loans that are disguised dividends because
they are really equity rather than debt?
Dividend paying capacity: What do cash flow
Goodwill: What level of earnings over normal
expected return can be reasonably projected?
Sale of stock: Have there been recent sales?
At what price? Under what conditions and to whom was
the stock sold? Have there been events since the sale
that significantly affect the value of the business?
A QUICK REALTY CHECK:
Let’s assume you and your co-owners have knowledge of
the relevant facts about the finances of the business.
Put two slips of paper in front of each person and ask
each co-owner to write the answer to two questions:
(1) What is the most you would pay for the stock
– if I owned it?
(2) What is the least you would take for the stock
– if I wanted to purchase it from you?
This “bid and asked” price technique will help establish
an acceptable price range, or assist everyone in coming
to a realistic ball-park figure which may be the average
of the hypothetical “bid and asked” prices.
Valuation of a business interest is a difficult
and uncertain process. Yet, for many purposes, it will
be necessary for a business or interest in a business
to be valued. In some situations it will be sufficient
to obtain a mere guesstimate. For others, particularly
where income, estate, or gift tax returns are concerned,
a much more defensible, objective, analytical, and thorough
process must be used. Purposes must be weighed against
Value is a variable upon which reasonable minds can
and will differ. But value must not be determined by
a mere flip of the coin or a flippant attitude. The
use of careful and thorough appraisals by qualified,
independent professionals, documentation, and well-drafted
arm’s length restrictive and binding agreements are
effective tools in establishing and substantiating values
that are fair and equitable to the parties involved,
and acceptable to our persuasive on federal and state
To discuss these or other issues you feel are important
to your personal or business security and success, please
feel free to call email.
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