Below are seven reasons why a company, an entrepreneur, a family or an individual may be required to have a business valuation performed.
- Sale of Business. A business owner desiring to sell their business requires a business valuation to establish a base value for the business. This will assist the business owner in listing it for sale, negotiating with potential buyers and getting through the due diligence phase.
- Estate or Gift Taxes. A business owner or family member making a gift of an ownership interest in an entity is required to have the interest in the entity valued to determine the fair market value of the interest that was gifted or the interest owned by a deceased owner in the entity. A business owner or family member may also make a charitable donation which also requires a business valuation for the donation to be at fair market value. The valuation should include compelling support and defensible positions for the conclusions of value and the discounts for lack of control and lack of marketability taken.
- ESOP. An Employee Stock Ownership Plan (ESOP) trustee is required to have a business valuation performed when selling stock to an ESOP as well as annually to determine the per share value of the stock in the company held by the ESOP for annual reporting and administrative purposes. The trustee of the ESOP Plan determines the adequacy of the valuation methodologies and ultimately decides the per share value for the stock in the company.
- Intellectual Property. A company’s largest asset may be its intellectual property. It may be necessary to determine appropriate damages for breach of IP in a litigation matter. Damages could arise for lost profits, royalties or diminution of value. IP disputes are common but most cases settle. Having a business valuation performed early in the case often helps in negotiating a fair settlement. A company may also need to know the value of the IP for a sale or a spin-off of the IP.
- Litigation. A shareholder dispute or dispute between partners in a company requires a business valuation be performed to determine either a) the fair equity value of the overall company (dissenting shareholder action) or b) the fair market value of the ownership interest(s) in the business. If a shareholder has the court approve the dispute as a dissenting shareholder action, then the standard of value is fair value and discounts for lack of control and lack of marketability would not be taken into consideration.
- Bankruptcy. A company going through a bankruptcy may require the business assets valued to establish their value as of the time the bankruptcy occurred. Depending on the purpose, the standard of value could vary from a) fair market value, what the business would sell for on the open market, to b) liquidation value, a lower standard that determines what the business assets would go for in an auction sale.
- Divorce. In a dissolution matter that involves a business owner, a business valuation may be required. The issues typically focus on the intangible assets which include discrete intangible assets professional or personal goodwill value). Additionally, if the business owner is a minority interest, then applicable discounts for lack of control and lack of marketability may be an issue.
In all of the above situations, it is important to work with an impartial valuation company who will be the advocate for the value.