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Three Reasons You May Need a Business Valuation

May 15, 2018

What is a Business Valuation?

An independent business valuation is based on a sound set of principles and approaches to estimate the worth or fair market value (FMV) of a business.  The three approaches to determine FMV are the asset approach, the income approach, and the market approach. No matter which approach or method is used, a business valuation is essential in determining the value of your company, based on sound principles and approaches.

There are many reasons you may require a business valuation. In this article, we discuss the three most common reasons for an independent business valuation.

1. Buying or Selling a Business

Many business owners and investors have a general idea or estimate of the value of the company they wish to buy or sell, but have little experience articulating that value. In our experience, many business owners tend to overlook tangible or intangible assets and business risk, apply inappropriate earning multipliers or discount factors, and fail to consider efficient ways to strip out non-core assets.  If you are considering buying or selling a business a business valuation will provide a better indication of value and offer strategies to maximize your value and minimize your cost.

2. Succession and Estate Planning

When individuals own a business and have intentions of transferring the business to their children or other related family members as part of their succession and estate planning, a business valuation should be used to establish the fair value. Common succession strategies often involve estate freezes for which a creditable valuation is a requirement of the taxation authorities.  Your business advisor can help you plan a tax strategy to minimize your current and future taxes.

3. Partner Exit and Dispute Resolution

Are you considering buying out a partner? Perhaps a partner is retiring or an owner is ready to quit and pursue other passions. As part of the buy/sell, a business owner must know the value of the exiting partner’s interest. A business valuation will assist the remaining owners in determining a proper value and structure so that the exiting partner is fairly compensated.

Sometimes life takes a turn and your family structure may change. The division of family property and assets can easily become complicated. Knowing the value of your business will ensure a supportable value is used for the settlement. Whatever the circumstance might be, a business valuation can provide the much-needed clarity in a dispute resolution involving business assets.

Your situation is unique. Please contact your DMCL advisor to discuss whether a business valuation is right for you.