Content area
Full text
For many small business owners, given that their business is often the most valuable asset they own, most transfers of personal wealth take the form of a sale, gift, or bequest of closely held capital stock, private securities, or other small business interests. Yet few owners have more than a rough idea as to what their businesses are worth. This is where accountants can perform a valuable service for their small business clients. This article is designed to give an overview of the most commonly used valuation techniques. In addition, it includes a case which illustrates the types of adjustments to the numbers found on a company's financial statements or tax returns that would be required in order to arrive at a more accurate answer to a client's question -- "What's this thing worth?"
WHO NEEDS A VALUATION
The need to know what a business is worth is not restricted to situations where an owner wants to sell his or her company and is trying to arrive at a price for this interest in the business. Perhaps the most common need for a business valuation is for estate tax purposes.(1) Even if no estate tax is due, the value of the business interest at the decedent's date of death is important inasmuch as it will determine the "stepped-up" basis for this interest which the beneficiary will have.(2)
In a related area, if the owner wants to gift some or all of his business interest during his lifetime, a valuation is necessary for gift tax purposes.(3) Even for the purpose of utilizing the annual exclusion,(4) a valuation would be needed to make sure that the transfers of closely held stock or other business interests do not exceed $10,000 to any one beneficiary during a particular tax year.
Another situation in which an accurate valuation is needed would be in formulating the "buy-sell" provisions that are commonly found in most shareholder agreements. These agreements not only provide for the orderly succession of ownership but also provide a basis for estate tax valuations which will generally be acceptable to the IRS.(5)
One of the tax-motivated reasons for a valuation is triggered by a C corporation's election of "S corporation" status. The new S corporation has potential liability...