Purpose
Why Have A Business Appraisal?
There are many motivations for having the value of a business appraised. Some valuations are required, such as in the cases of gift or estate taxes, while others originate from the desire to identify a value, such as a basis for a business purchase or sale.
Business Appraiser Services
Buying or Selling a Business
Those looking to buy or sell a business often use a business appraisal to establish an asking price or an offer price for their business. Furthermore, business appraisals are performed to make sure the transaction price is reasonable when buying or selling a company.
Partnership/Shareholder Agreements (Buy/Sell)
One of the most important agreements between partners or shareholders - a buy-sell agreement - should be based on a business appraisal to ensure a fair transaction. A business valuation is performed when a shareholder is buying into a business or professional practice, or when they exit as well, so they won't be left asking "What's the real value of my stock?"
Marital Dissolution (Divorce)
During a marital dissolution, a closely held business can be a valuable marital asset. Frequently, each spouse hires a business appraiser to value the business interest; however in some cases, just one business appraiser is retained by both parties. We will prepare an objective, unbiased, and professional value conclusion - professionally and confidentially.
Estate Planning (Gifts, Charitable Contributions, or Inheritance)
Interests in closely held businesses are often transferred during the lifetime of the owners to minimize the estate taxes that will be due. Business appraisals are typically required and must be included with the gift or estate tax returns filed with the IRS. Since these business valuation reports are closely examined by the IRS, it is important to retain a highly qualified and experienced business appraiser to prepare the needed company valuation.
Family Limited Partnership (FLP) or Limited Liability Company (LLC) Discounts
These entities are often used as estate planning vehicles for owners of closely held businesses. Minority business interests can be gifted while the owners still maintain control of the business. Business valuation discounts typically apply to the minority equity interests that are gifted, which saves on gift and/or estate taxes. Your attorney can help you structure the entity that is appropriate for your situation. We can prepare the business valuation report, which will address the appropriate discounts.
Employee Stock Ownership Plans (ESOPs)
Employee Stock Ownership Plans (ESOPs) are created to transfer a portion or all of the ownership of a business to employees. There are many reasons for doing so but it is a complex area - Department of Labor rules and regulations apply to ESOPs. When dealing with an ESOP, the stock must be valued by an independent business appraiser annually.
Litigation Issues Involving Lost Profits or Economic Damages
These cases often require a business appraisal in order to establish the amount of economic damages that occurred. Frequently, the business must be valued twice - both before and after the action that resulted in the damage occurred. The difference between the two often represents the amount of economic damages.
Dissenting / Oppressed Shareholder Litigation
Shareholder disputes can arise from numerous situations. Frequently the problem involves a minority shareholder who is not receiving any return on his or her investment in a closely held company while majority owner(s) extract large amounts of benefits (money and perks) from the company. In these situations, it is a necessity to engage a competent and professional business appraiser to get a comprehensive business valuation performed.
Mergers and Acquisitions (M&A)
Business valuations should be performed when one company wishes to acquire or merge with another. In this type of assignment, each business is valued as a stand alone entity; then the two businesses are valued as if combined using anticipated synergies from the merger. This business appraisal approach provides guidance to each party on how much can and should be paid for the other. M&A transactions can also create the need for shareholder motivated fairness opinions.
S Corporation Elections
Businesses frequently find they can reduce their tax burden by changing from a C-Corporation to a Subchapter S Corporation. This election often eliminates corporate income taxes paid at the business level. When this election is made, a business appraisal may be required if assets are subsequently sold as the sale may trigger a taxable event.
Insurance Claims
Often insurable damages are appraised in order to receive payment from the insurance company. These assignments should be performed by competent business appraisers since the reports will be scrutinized by the insurance carrier.
Insurance Coverage
When obtaining insurance coverage on your business or for 'key-men', it is imperative to have the right amount of coverage. Too much coverage can bring unnecessary expense; while too little can leave one overly exposed in the event of a claim. In order to protect your assets sufficiently, a business appraiser should be engaged to determine the business value.
Bank Loans and Other Financing
When applying for a commercial loan, it is common for the loan officer to ask for the firm to obtain a business appraisal in order to determine credit exposure. Having a competent business appraiser perform the business valuation can make a difference between obtaining the financing or not.
Eminent Domain Actions
Governments frequently invoke Eminent Domain laws that require your business to be sold and/or relocated. In these actions, it is important to have a competent business appraisal firm value the business so that a fair price is paid.
Intangible Assets and Goodwill Impairment (SFAS 141 & 142)
Statement of Financial Accounting Standard (SFAS) 141 on Business Combinations states that intangible assets must be valued and recorded on your financial statements. SFAS 142 states that goodwill must be recorded on the balance sheet and tested at least annually for impairment. It is important to have a competent business appraiser calculate the amount of the intangible assets and to determine, at least annually, if any goodwill impairment occurred.
Incentive or Employee Stock Options (ISOs and ESOs)
Incentive stock options are an important component of employee, board, investor, or advisor compensation. Rule 409A has recently changed the landscape for issuing incentive stock options. It is important to have competent business appraisers determine the value of the options to be granted.
Strategic Planning
Prudent financial, operational, and strategic stewardship of a private company includes understanding its business value and how it may have increased or decreased over a particular time period. Company value can change for a variety of reasons - some of which are caused by the courses of action taken by management, while others are simply due to a change in economic or industry conditions. With these changes, optimal operating strategies can alter course as well; therefore it is imperative to periodically revisit your operating plans in order to sustain valuable competitive advantages. Having a business valuation performed annually, by a competent business appraiser, to measure value enhancements is a critical component to this process.
