COVENANT BUSINESS PLANNING SOLUTIONS

What is Your Business Worth?

If you are like many business owners, the vast majority of your wealth is tied up in your business. But do you really objectively know its dollar value?
 
There are a number of tax, business and financial planning reasons why you should know the value of your business, including:
• Estate valuation and liquidity analysis
• Buy-sell valuation
• Valuation of charitable gifts
• Divorce and prenuptial arrangements
• Ascertaining the worth of a business as loan collateral
• Mergers
• Recapitalization
• Lawsuits between partners
 
Do You Know The Fair-Market Value of Your Business?
 
Valuation of a business is both an art and a science. It is an attempt to determine what is known as fair market value, or the value that a buyer and seller agree upon through an arms-length transaction with neither being compelled to act and both having knowledge of the relevant facts.
 
What Does the IRS Consider?
 
The IRS has eight factors it will look for in the valuation of a closely-held business. These include:
1. The nature and history of the business
2. The economic outlook in general and the outlook for the industry in particular
3. Book value (assets minus liabilities) and financial condition
4. Earnings capacity
5. Dividend-paying capacity
6. Goodwill or other intangible value
7. Prior sales of stock of the operation
8. Comparison to similar, publicly-traded companies 
 
The Family View
 
Laura has worked with her father for twenty years, right out of college. He started a manufacturing business before she was born and her marketing degree was a great asset in helping Dad grow that business in recent years. Now, Dad wants to retire and Laura wants him to sell the business to a third party, so she can start her own PR firm.
 
Laura thinks: Dad spent his whole life building up the business, so it has to be worth a lot of money, right? Not necessarily. 
 
Family members will always include the emotional cost of the business, such as long work hours, missed family events and no holidays, when thinking about the value of the business.
 
Buyers always want to pay the least amount for the business and the seller always wants the most. In order to minimize these differences, it is important to get an expert’s view of the value of the business.
 
Successful business owners are experts in their business, and they go to great lengths to ensure that they are getting the best value from their suppliers and for their customers. 
But for valuation they often rely on accountants and other advisers who have inadequate expertise in their professional area. As a result, business owners may be under-selling the business or raising unrealistic expectations of value - a situation that is guaranteed to result in family discord for the survivors.
 
The IRS has maintained that no fixed formula is universally applicable, except for formulas set out in a properly designed buy-sell agreement intended to approximate fair-market value.
 
In our next blog, you can read more about Valuation Methods and which is right for your business.