Reasons for Obtaining a Business Valuation
Gift and Estate Taxes
Gift and estate tax issues are becoming more complex. Wealth attained through business operations, transfers, and inheritance invariably results in tax liabilities. This issue is compounded with gifting of closely held stock, family limited partnerships, or charitable contributions. A credible valuation can minimize taxes and reduce the potential for IRS audits or other legal disputes.
Employee Stock Ownership Plans (ESOPs)
Tax law changes require some businesses to undertake a business valuation. The Tax Reform Act of 1986 requires that a qualified independent business valuator provide a stock valuation upon the formation of an Employee Stock Ownership Plan (ESOP), and each year thereafter. The valuation must reflect consideration of the treatment of leverage, control premium, minority interest considerations and repurchase liabilities. Conforming to the Employee Retirement Income Security Act (ERISA) and Department of Labor (DOL) regulations, along with other industry standards, is required. The complexity of these issues suggests you need a business valuation professional with the expertise to analyze the information and comply with all of the regulations.
Allocation of Acquisition Price
The Revenue Reconciliation Act of 1993 established additional benefits through proper allocation of the purchase price to personal, real and intangible property. Fair market valuations are required on various purchased properties in certain asset and stock acquisitions. At times, it may be advantageous to allocate the purchase price among various legal entities as part of the lump-sum purchase transaction.
Prudent Business Purpose
The prudent rule prior to entering a business is to establish a formal agreement for getting out of the business relationship. Buy and sell agreements allow the business owner to transfer an interest in the business to other owners or to the business itself The agreement can guarantee a buyer for the. business and eliminate difficulties associated with transferring the business upon death or disability of one or more of the owners. Conflicts among interested parties to the business may be minimized by clearly establishing the definition of market value prior to the time of need.
Providing a fairness opinion minimizes exposure by meeting the Business Judgement Rule. Due diligence reports, or fairness opinions, are required by the Securities and Exchange Commission (SEC) in transactions involving public stock offerings. Boards of directors will ask for a fairness opinion to comply with their fiduciary duty to shareholders by providing outside, third-party objectivity. Fairness opinions are also called for in mergers/acquisitions, determination of controlling versus non-controlling interests, and when fairness may be questioned by interested parties to a transaction.
Valuation needs frequently arise when attempting to secure financing or when renegotiating a current existing obligation. Business valuations include a determination of the value of tangible assets and intangible assets. Tangible assets may include buildings, land, equipment, inventory or receivables. Intangibles may include goodwill, customer lists, trademarks, non-com-pete agreements, patents or leaseholds, to name a few. Determining the market value of the company's capital assets will help determine the ability of the business to cover its current obligations and/or projected future debt.