Oftentimes, there are changes in the partnership agreements or stockholders of an existing company, or other “triggering events” that pop up in the course of owning/running a business. Frequently, these kinds of situations call for a professional business valuation to be done to ascertain the monetary value of the business.
Business valuations can take several forms and can be very complex. How a business’ worth or the value of a particular owner’s share is determined needs to be done in accord with a prior agreement (a buy-sell agreement.) Those doing business valuations must follow these pre-set formulas and “rules.”
Since objectivity and neutrality is desirable, and since the task can be very involved, it’s best to trust an experienced financial planner with your business valuation.
Here are the top 10 reasons why people order a professional business valuation done:
1. Your Business Is Buying Life Insurance
Life insurance can be an important part of your business. Aside from offering it to your employees as an employee benefit, a life insurance policy can cover you, your business partners, or the interests of the business as a whole.
When setting up a business-related life insurance policy, you may need to have a pro-business valuation done.
2. Life Insurance Premium Financing
Aside from straight-up buying a life insurance policy, a business valuation may be involved in setting up a premium financing plan for high-net-worth individuals who don’t want to tie up too many of their business (and other) assets.
In short, a loan from a third party finances the premiums on a high-value life insurance policy. There is then a repayment plan for the loan, which can have a fixed interest rate for added security.
Aside from life insurance, note that premium financing can be used to fund buy-sell agreements, group-rate life insurance, estate planning, and more. These arrangements let you keep more of your capital at work in your business.
3. You Are Setting Up A Buy-Sell Agreement
Another reason to find out how much a business is worth is to plug in a specific number to a business buy-sell agreement. A buy-sell agreement is established to determine rules by which a business owner’s share in the company can change hands in the event of his/her death or another specified triggering event.
You may need to do a reappraisal of the business’ value periodically in accord with the buy-sell agreement so its value can be continually updated as needed. And a business valuation may need to take place after an owner’s death and before his/her shares change hands.
4. A Business Merger Or Buyout Is Coming Up
When a business is about to buy out another business, it will want a business valuation done to get a good idea of how much the soon-to-be-purchased business is really worth. The same principle applies when a business merger is coming up soon.
On a similar note, you may want to use business valuations in the months or years prior to selling or merging your business. It can be a valuable part of your overall “exit strategy” if you are looking to sell out and turn a new page in life.
5. To Deal With Stock & Shareholder Issues
Another motivation for business valuations is to determine the value per share of stock in the company. This may be stock owned by employees, business partners, or investors.
Additionally, a special business valuation may be needed to resolve certain types of shareholder disputes.
6. To Determine Various Tax-Related Issues
A business valuation may be necessary in order to determine various tax issues. For example, you may need to report estate taxes after a business partner passes away.
Or, you may need to figure out how much a gift tax will be or how much capital gains tax would be if you switched over from a C to an S corporation.
7. In The Event Of A Bankruptcy Or Divorce
If your business is declaring bankruptcy or if you are personally filing for bankruptcy, and you own significant shares in a business, a business valuation will influence how much you can keep (and other issues) in the aftermath.
If you are going through a divorce, and your business comes into play when dividing assets or determining alimony, child support, and the like, then a business valuation may become necessary.
8. To Compare Your Business’ Value To “Market Value”
There may be a difference between your business’ intrinsic and fair market value. Professional business value assessors can find out if there is, and if so, by how much and in which direction. This may be a major factor in making various business decisions.
9. You Want To Get A Loan Or Attract Investors
Sometimes, business valuations are motivated by a business owner trying to get increased cash flow into the business. This may be via a bank loan or a new investor. Either way, the bank or investor is going to want to know how much your business is valued at and on what basis.
10. To Find Out Where Your Business Is At Financially
Finally, you may want to have a professional business valuation done simply so you can know where your business is at financially.
You want to know if it is growing or shrinking. You want to pinpoint any problem areas or hindrances so you can boost future growth and efficiency. A business valuation is a helpful tool to do just that!
The 3 Major Ways In Which Business Valuations Are Done
There are three top methods for evaluating the financial worth of a business:
- Asset-based assessments – With an asset-based method, you simply add up the value of the business’ assets. This can be based on “book value” from a balance sheet or on how much those assets would fetch you during liquidation. You also have to then subtract business debt from the assets total.
- Earning-value assessments – This approach is meant to determine the business’ ability to create more wealth in the future. This method is popular with those wishing to buy out or merge with another business in the near future.
- Fair market value approach – This looks at how much similar businesses have sold for in the recent past. You have to be careful you are comparing “apples and apples” not “apples and oranges” when using this method.
Whatever approach to business valuations you are interested in, and whatever reasons may be motivating you to get one done, you want to entrust the task to experienced, professional experts.
To talk to an expert today and to learn more about how business valuations work, contact Flagler Financial in Central Florida!
