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Bay
Financial Newsletter
VALUING
A CLOSELY-HELD BUSINESS
There
are many reasons why a business owner might need or want to value a
closely-held business. These include:
(1) Planning
for estate liquidity
(2) Making a gift
to a family member, a friend or to charity
(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 projections show?
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.
CONCLUSION
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
costs.
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 taxing authorities.
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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