Now that you have your personal financial statement compiled and you are monitoring KPIs through your customized dashboard, let’s consider your exit or succession plan and the purposes of a valuation.

People choose to prepare a valuation for a number of different exit reasons. Everything from internal business decisions to retirement and estate planning, to planning for a sale. A valuation will provide you with a wealth of information about your company regarding its potential worth and how you stack up against your competition. Below are six scenarios that business owners cite for their valuation preparation.

Merger and Acquisition Activity

In planning to buy or sell a business, it is essential to first gain an understanding of its potential fair market value. When a company is marketed and offers are received from qualified buyers, the sellers can then utilize the valuation to gauge the reasonableness of the offer. Conversely, someone buying a business can use the valuation in formulating their offer.
Buy-Sell Agreement
Do you have a plan for when an owner leaves the business? A buy-sell agreement is a binding contract among all the owners that defines some of these common business issues:

Upon departure, can the partner be bought out?
Who can force/require a buyout?
Defines the valuation formula.
Defines the payment term and method.
Who can buyout a partner?

This is importation because unfortunate and unavoidable life events occur. People retire. People get divorced. Companies merge and are acquired. Companies declare bankruptcy. People experience disability and inevitably death.

Employee Stock Ownership Plan (ESOP)

An ESOP is a program in which ownership interests are transferred to a company’s workforce. While they can be complicated, ESOP’s provide significant tax advantages while also providing additional benefits to employees. An independent valuation of the company’s shares is required at the inception of the ESOP and at least annually from there onward.

Retirement and Estate Planning
Retirement and estate planning give you control over how your assets are distributed during your life and after death and is an integral part of minimizing estate, gift, and inheritance taxes. In most situations, if an ownership interest passes to an individual or trust in the form of a gift or inheritance, an independent appraisal of the business interest is required to be prepared and submitted to the IRS along with the estate, gift or inheritance tax return.

Divorce

Very often in divorce proceedings, ownership interests in closely held businesses are included as marital property. In these situations, it becomes necessary to agree on the value of the business in dividing the marital assets. An independent valuation analyst can help to determine the value of the business interest. Marital property laws vary from state to state, so it is critical for the analyst to be knowledgeable and up to date on the current legal landscape.

Litigation

When two parties cannot come to an agreement on a dispute, litigation can become the only option. Certain disputes may require the opinion of an independent valuation analyst in order to settle the matter. These include minority or oppressed shareholder disputes, damage to business value, and failed business combinations, among others. Valuations for litigation support purposes may also require the appraiser to appear as an expert witness in a court proceeding. This presents an additional challenge as the valuation conclusion will be questioned by the opposing party’s counsel.

Financial Reporting

In certain situations, most commonly when businesses are combined, generally accepted accounting principles (GAAP) require a valuation to be performed for financial reporting purposes. Also known as fair value measurements, the valuation results are then incorporated into the combined companies’ opening balance sheet. The valuation can also serve as a basis for the purchase price allocation.

In any event, it is in the best interest of your company and your financial future to establish an exit strategy from the day you open your doors. If you don’t know where to start, contact us to make your appointment to plan for tomorrow today.

By Wilke & Associates, CPAs