construction; government contractor and technology; not-for-profit; real estate; emerging growth companies
business advisory; forensic accounting
Abstract:
The valuation of a small closely held business is a complicated calculation because there are numerous qualitative and quantitative factors that affect the value of a company. Qualitative factors to consider are the quality of the current employees, location of the business, the industry’s legislative environment, competition, and the stability and longevity of the company. Quantitative factors include the company’s historical and projected financial statements, industry statistics, and other financial information that is relevant to the company.
The approach used will depend upon the seller’s intentions. If the seller wishes to pass on the business to a family member, the valuation is for tax purposes and must be based on fair market value. The owner wishing to sell to a third party will want to maximize the sale price. Because market conditions can change rapidly, a valuation may not be relevant if not used within a certain time period.
When selecting a valuation method, it's critical that you know the purpose of the business valuation and the seller's intentions.
Business valuations may be completed for a variety of reasons. Many are conducted for estate planning or, on the opposite side, post-death estate taxes. The valuation is particularly important in the cases of estate or gift taxes. The IRS requires valuations of closely held corporations to be at fair market value, instead of book value. Fair market value is defined as the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. If the IRS finds that the sale of a company has been undervalued, this could create a tax liability for those involved in the transaction.