Factors to Consider When Valuing a Small Closely Held Business

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By: Mike Meegan

Abstract:

In Rev. Rul. 59-60, the IRS describes eight factors that should be considered when valuing a closely-held company. These include the nature of the business and the history of the enterprise from its inception. Stability, growth and diversity of operations are assessed to measure its degree of risk.

Additionally, these factors include the economic outlook in general and the condition of the specific industry in particular. Current and future economic conditions of the country's and industry's economies should be evaluated. The company is compared with competitors, and that industry is evaluated to see its competitiveness in the overall economy.

From the stock's book value to economic conditions, the IRS suggests a number of factors to review for business valuations.

Book value of the stock and the financial condition of the business. Balance sheets should be examined for at least two years prior to the valuation. Financial analyses should be made to determine the company's liquid position, gross and net book value of fixed assets, working capital, long-term indebtedness, capital structure, and net worth. Trends should be evaluated. If more than one class of stock exists, voting rights, dividend preferences, and liquidation rights should be considered. For the five other factors to consider, please download the PDF of the full article as shown below.

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