Estate & Gift Tax Planning
When transferring shares in a corporation or interests in a limited liability company (LLC), having a business valuation performed, prior to any transfer, will determine what the shares or interests are worth to help stand up to any IRS scrutiny. If the value of your interest, plus the value of your other assets exceeds the federal estate threshold exemption amount, you will most likely work with tax professionals to design a plan to minimize estate taxes that will be passed along to your heirs.
Buying or Selling a Business
What should I pay or sell a particular investment for depends on what the interest is worth. For most business owners, their business is their most valuable asset. Oftentimes, the standard of value in the majority of business valuation assignments is fair market value, simply meaning – What is the price a transaction would likely occur between a hypothetical buyer and a hypothetical seller? At the very least, a business valuation can help make an informed decision whether to purchase or sell the business or ownership interest.
Creating an ESOP
When an owner wishes to share some level of ownership in the business with employees, an Employee Stock Ownership Plan (ESOP) is formed. Another reason behind forming an ESOP is for the current ownership to exit their interest at a higher value over time. According to information from the National Center for Employee Ownership Association, there are over 7,000 companies organized as ESOP’s.
Shareholders can have disagreements that result in one or more shareholders wanting out of their interest. At what price? Is it fair to all parties involved? Buy-sell agreements typically have a formula that is used to determine the value or price. However, some agreements speak exclusively to having a business valuation performed.
Litigation / Divorce
Obtaining a business valuation in either litigation or divorce setting may help individuals and/or trier-of-fact (Judges) determine equitable settlement of assets.
How much should an investor invest in a particular business? Very often depends on what the company or interest is worth. While value can be set using key financial metrics (e.g., a multiple of earnings), a business valuation may be preferable prior to bringing in an investor or investors so all parties are aware of the value of their interest at the onset of their investment. Interest holders also like to know if their investment is growing, so an annual business valuation report serves to satisfy this requirement.
You may wish to support a charity using your ownership interests, as a source of a gift. Accordingly, an appraisal may be mandatory according to IRS regulations, when the deduction is over a certain amount.