Succession Plans Often Hinge on Reliable Valuation

The “fair market value” of a business is a price that is acceptable to a willing buyer and seller, neither of whom is under any compulsion to complete the transaction, and with both parties having reasonable knowledge of the relevant facts. Still, lenders generally require a professional valuation (or appraisal) before extending credit to business owners or buyers.

Even if a loan or sale is not in your immediate plans, a precise valuation may be useful for effective succession, tax, and retirement planning.

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Three Ways to Determine Value

A professional accountant or business appraiser may employ one or more of the following methods when assessing a firm’s value, depending on the nature of the business and other relevant factors.

Asset-based approach (also known as cost approach). Considers the fair market value of fixed assets and equipment and the wholesale value of current inventory, minus any liabilities.

Market approach. Compares the business to similar enterprises that have sold recently, adjusting for differences in size, risk, market position, and other characteristics.

Income approach. Calculates a value based on the company’s ability to earn income. Basically, the average earnings over a certain period of time are divided by a capitalization rate that typically applies to the specific industry.

The value is often expressed as a multiple of net income or revenue. Because many variables can influence how much a business may be worth, the resulting estimates are often fairly subjective.

Making Informed Decisions

Here are a few situations in which you might need to know the current value of your business.

  • If your firm has more than one owner and you have negotiated a buy-sell agreement, the buyout value should be updated regularly to reflect market conditions and the company’s financial position.
  • When transferring ownership of a family business to the next generation, an accurate valuation may help ensure that partnership shares conform to the IRS annual gift tax exclusion (currently $15,000 per person, per year).
  • In the event of a divorce or other type of legal dispute, a professional valuation may help you negotiate a settlement or support litigation.
  • Finally, understanding the true market value of your business may help you make more informed decisions about how much of your income should be saved and invested for retirement.

 

This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.

R. Patrick Cargill, CPA
1801 Oakridge Circle Ste 102 St. Joseph, MO 64506
Phone: 816-233-7733

Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC)

Federal and state insurance and securities rules and regulations prohibit registered representative(s) and/or investment adviser representative(s) from soliciting, offering and selling any insurance or securities products or providing investment advice until they are properly registered and licensed in each state jurisdiction.

Securities and investment advisory services offered through Voya Financial Advisors, Member SIPC.

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