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Business Valuations

All Business Valuations Are Not Created Equal

There are many different situations that require a valuation, each with its own inherent factors from which the valuator makes certain presumptions. Some presumptions arise from legal precedents or regulations and rulings, others from business or market place practices. Depending on the facts and assumptions that accompany a specific situation the value arrived at for the same item can be very different.

Purchase or Sale Value

One of the most common reasons for determining the value of a business is a purchase or sale of the business. It is presumed that neither side is under duress to sell or buy with this type of valuation. Other items that are considered include the value of the business as an ongoing concern, the risks related to the continuity of the business, the historical earnings of the business, and an analysis of any uncertainties involved. The projected future income of the business is also a factor in a valuation for a sale or purchase.

Valuation to Obtain Financing

The lending officer's valuation presumes a necessary level of projected cash flow to meet the bank's interest and principal payments as well as the liquidation value of collateral in case of a foreclosure. These may be different presumptions than those made for a purchase or sale value, therefore the value arrived at may be different.

Valuations for Tax Purposes

Valuations for tax purposes are often the focus of IRS rulings. Inheritance tax valuations might presume the loss of what may have been a key employee and perhaps even the liquidation of the business to pay the inheritance taxes. Gift tax valuations may be able to presume a minority interest discount or lack of marketability discount. Naturally, since the purpose of gift tax valuations is to objectively minimize tax payments, these discounts are generally provided for.

Valuations Between Partners and Shareholders

Valuations between partners and shareholders also have different presumptions. If the purpose of a buy/sell agreement is to penalize a shareholder for terminating ownership or employment, the valuation method might not be reflective of fair market value.

If a buy/sell agreement is funded with the proceeds from life insurance, the controlling presumption is often the estate planning needs of the owner rather than the true value of the company.

Finding the Right Value For Your Purposes

It must be understood that there is no one value for a business, and what might be the rightvalue for one purpose will not work in a different situation. A valuator analyzes these differences and understands the presumptions inherent in each type of valuation. They can select and implement a method to determine the proper value for the purpose at hand.

Berenson LLP works closely with its clients to provide for them the Business Valuations that best suits their situation. For further information or assistance please call or contact Berenson LLP.