The business you own may make up most of your net worth. When you consider the future disposal of your interest in the business — wholly or partially — it will be essential to determine an accurate value for the business.

Disposal can take many paths. Perhaps you will plan to retire and transfer ownership to a family member or to sell all your interest to an outside party. You also may decide to sell your ownership interest to your employees through an Employee Stock Ownership Plan (ESOP). With any plan to change your ownership arrangement (including a merger, acquisition, or buy-sell agreement), you will need to establish a reliable value for your interest.

That’s important because you don’t want to sell your business for less than it is really worth. An accurate valuation lets you negotiate realistically with buyers. Misunderstandings can be avoided and time saved.

If you someday dispose of your business through a gift or it is transferred at your death, determination of a realistic and accurate value will ease the calculation of gift and estate taxes. If your death is unexpected, a valuation can be even more important. Control of many a family business has been lost because of forced asset sales to satisfy estate tax obligations. With accurate advance knowledge of the worth of your business, you may be able to use insurance or other strategies to assure that your estate will have sufficient liquidity to handle estate taxes.

No standard method exists to determine value because each business is different. But valuation professionals and the IRS typically use a group of factors when they fix the value of an operating business. These factors include the company’s:

  • Nature and history
  • Economic outlook
  • Annual budget, sales history, and sales projections
  • Financial condition and stock book value
  • Capacity for earnings
  • Ability to pay dividends
  • Previous stock sales and block size being valued

The general economic outlook may also be a consideration, as well as the prices of stocks of similar, publicly held companies.

Usually valuation professionals examine a combination of the above factors to determine an appropriate value. A factor that may control the valuation of any size corporation may not be nearly as important when valuing another corporation whose type of business is different. When determining valuation, each closely held corporation is unique.

Any valuation report you receive should be both well documented and comprehensive, with confidential treatment for any company information. You should be able to rely on your valuation professionals for their full support if any question is raised about the valuations of your business. Their support should extend to reporting to your Board of Directors and defending their work in court or to the IRS.

Sue Price-Scott, CPA is a partner at Alegria & Company and specializes in business and personal income tax and is accredited in business valuation.

She can be reached at spricescott@alegriacpas.com

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