A Valuation May Be What Your Business Requires

A valuation may be what your business requires

With the economy currently healthy, but its future uncertain, many U.S. companies face challenges. Chief among these is financing — which isn’t easy to secure, because lenders imposed tough standards after the last recession and fear another hit.

A business valuation conducted by an outside expert can help you present lenders with timely, in-depth financial data. This will make it easier for bankers to understand how your business runs. And the valuation’s discounted cash flow section will show how your expected future cash flows will build value.

Preparedness is a weapon

A valuator also will turn up important company-specific information, including your and your managers’ awareness of market conditions and specific risks you face. This will be the time to evaluate your contingency plan to mitigate those risks. Additionally, some company weaknesses may come to light during the valuation process. Armed with that information, you can then take steps to strengthen your “soft spots.”

As a business owner, you never know what proverbial winds may blow your way. For example, your partner might, unexpectedly, want to leave the business. He or she might decide to retire early, or need to cash out for personal reasons. Or health concerns may enter the picture.

Valuations and buy-sell agreements

For these reasons and more, it’s important to draft and maintain a buy-sell agreement. This contract among a business’s owners sets guidelines for the transfer of their ownership interests. The agreement gives the remaining owners (or the business itself) the right to buy an exiting owner’s interest if a “triggering” event takes place. In addition to an owner’s desire to leave the company, such events include divorce, disability, retirement, death, or loss of a professional license or certification.

So, what does all of this have to do with a business valuation? A valuation of your company plays a key role in the creation and maintenance of a buy-sell agreement. Specifically, it could help you address the preferred valuation method, the appropriate standard of value, the effective valuation date, and the applicability of valuation discounts and premiums.

Is it time?

There’s no getting around the fact that a key reason for seeking a valuation is to prepare for a business transfer. Even if you aren’t sure you want to buy, sell or gift a business interest, an evaluation may help you get a better sense of whether now is the time.

Most valuators subscribe to transaction databases that report recent selling prices of similar private businesses. In conjunction with input from other professionals, the information gleaned from the valuation can help you come up with a creative deal structure — one that minimizes taxes, provides you with income to fund retirement and meets other transfer objectives.

In good stead

In the eyes of a potential buyer, a formal valuation adds credibility to your asking price. And if you’re gifting business interests, it’s a must-have to survive IRS scrutiny.

Alternatively, if you’re able to buy out a competitor or other business, a valuation should play a critical role in your due diligence. An evaluator can scrutinize the seller’s asking price, including the reasonableness of cash flow and risk assumptions, when negotiating the final sale price.

For more information on our services, please visit our tax services page or our general services page. If you have any questions, please contact one of our tax professionals at (973) 298-8500.

© 2019