Reasons For Business Appraisal
You Need a Business Valuation If…
- You’re taking over ownership of a business, or are planning to buy into a privately held business.
- You’re planning on conducting a stock or asset sale for your business.
- You’re establishing an ESOP, or your company currently maintains one.
- You want to fairly terminate a business partnership.
- You’re planning to give a share in your business as a gift.
- You are taking your company public.
When the time comes, the company’s principals, its counsel, or independent accountant should consider the advantages of an independent, professional appraisal by a specialist in the field of business valuation. Some specific business situations which may call for a formal valuation study include:
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Estate and Gift Taxes. Placing a fair, well-documented value on a business interest is essential to minimize potential problems with the IRS. |
Litigation. An objective appraisal can be invaluable in helping to reach a pretrial settlement. If the matter goes to trial, expert testimony can greatly strengthen a case where the value of a business interest is an issue before a court or arbitration panel. |
| Estate Planning. It is important to have an accurate value for a business interest to adequately fund a future estate tax liability. | Mergers and Acquisitions. Selling or buying a company is likely the most important decision a business executive may ever make. Setting a fair price, including structuring payment terms to meet the needs of both parties, is necessary for a successful transaction. |
| Buy/Sell Agreements. To avoid a potential problem, it is often desirable to have a buy/sell agreement in effect between the principals of a privately held business. Each type of business is subject to different valuation parameters and it is important that the contractual price is fair to all concerned parties. | ESOPs. Shares of Employee Stock Ownership Plans of privately held companies must be valued by an independent appraiser annually to establish a fair stock price to meet ERISA and IRS requirements. |
| Partnership Dissolution. When one partner wants to sell, it is often necessary to have an independent appraiser value the interest to arrive at a fair settlement. | Leveraged ESOPs. Understanding of specialized valuation concepts is needed to appraise these highly complex financing-pension plans. Knowing what to expect in the second and later years’ appraisals is a must when analyzing and establishing a leveraged ESOP. |
| Divorces. When the parties have an interest in a privately held business, the fair market value of the holdings must be established for an equitable division of assets. Often, expert testimony is required if a settlement cannot be reached. In some cases a single appraiser may be retained jointly by the parties. | Public Offering. It is important to establish a public offering price that enables the company to meet its capital goals, yet is attractive enough to investors that the offering can be fully subscribed. Due diligence examinations done by an independent third party are helpful in satisfying both federal and state regulatory concerns about pricing as well as full and accurate disclosure. |
| Compensatory Damages. Expert appraisal of damages is necessary in cases where lost profits or diminished business value is an issue. Typical examples include breach of contract, fire, and antitrust violations. | Raising Capital. An independent, objective appraisal may be most helpful in negotiating with venture capitalists or other prospective investors. |
| Going Private. When a liquid market never develops for a publicly traded stock, the controlling shareholders may want to eliminate reporting requirements and expense. By law, a fair price must be offered to the minority stockholders. | Recapitalization. In this method of reorganizing a corporate capital structure, not only must the total value of the company be appraised, the value must also be allocated between the various equity interests before and after the recapitalization. |
| Leveraged Buy-Outs. Occasionally the management/employee group would like to buy a company from existing owners, public or private. In this situation a fair price is mandated. | Stock Options. Establishing the fair market value of stock options to be issued to employees, particularly in a new company, can be crucial to attracting and keeping qualified, motivated employees. |
