Business Valuation Blog | Understanding Buying / Selling a Company

Whether you've put serious work into building a legacy for your children or are inheriting a business that has been passed down for generations, family businesses provide strong ties and require dedication from one generation to the next. That aspect of the business means that valuing a family owned business must be undertaken with a focus on the family, reputation in the community and many other facets to develop a true determination of business value. Here's a look at the differences that must be considered during the appraisal of a family business.

How valuing a family owned business is different than other business appraisals

Initially, differences in valuing the family business will depend strongly on the reason for the valuation. Is the business being sold to another family member? Will it be a gift to heirs? Are you trying to get ahead of potential estate tax issues that could arise? Is key personnel insurance being considered in case a particular individual dies or is incapacitated before the next generation can take over? There are many different reasons for getting a business appraisal which can impact the type of appraisal performed.

For many situations, fair market value is used to determine the business' value. This provides a fair distribution of the tax burden between the existing owner and the future owner of the business. It's also one of the most commonly-used approaches to valuing a business. However, in some situations, future income levels may be considered in a business that is currently growing. A good example of this is for key personnel insurance, where that individual is vital to the continued growth of the business. If that individual was incapacitated, it may cost the business future income, so it's important to own a policy that meets those future expectations.

Another area where a family business is different that a regular business is in community reputation and goodwill. Because a multi-generation business typically has some significant amount of history, it often has built significant goodwill in the community. The reputation that has been built over the decades and the existing consumer base will provide a new owner with a great deal of leverage as compared to a relative newcomer in the community. This reputation and goodwill must be taken into account during the valuation process to ensure the full value of the business is calculated.

Because family businesses are passed from one family member to the next, it's generally expected that the business will continue to see strong performance in the industry. When compared to the general uncertainty of a business that is being purchased by a stranger, family businesses are typically much more stable. Knowing that the business will stay within the family reassures customers and investors that past performance levels will be retained into the future, building confidence in the company and ensuring a promising tomorrow.

Valuing a family owned business requires a special skill set and knowledge so that the unique facets of that business are acknowledged during the process. A certified business appraiser has spent a significant amount of time being trained in aspects of company valuation using standardized methodologies in the process. If you're considering having a business appraisal completed on your family business, make sure your appraiser has certification and is experienced in appraising in family businesses.

When you're working on an exit strategy for your business, you've got a lot of different options to consider. But one area where you can discover real value is through a business valuation for exit planning purposes. By determining the valuation of a company, you can figure out exactly where you need to improve your business before putting it up for sale or passing it on to the next generation. Here are some details on how you can use business appraisals to plan a comprehensive exit strategy.

How to Use a Business Valuation for Exit Planning Purposes

A business valuation is a financial document that provides solid evidence of your business' value. It can provide significant insights you may not have considered into your position in the market, your daily operations, your balance sheet and a number of other aspects. By having this information in hand prior to completing exit planning, you can determine whether it is worthwhile to make particular improvements to your business to maximize profits from the sale of your business.

One of the first areas of scrutiny that many prospective buyers will look at will be your business' financial statements. But what if you've had the occasional irregular income or expense? A qualified business valuation specialist is able to put your paperwork through adjustments in a process known as normalizing.This provides prospective buyers with a much more accurate view of your business' financial picture. Beyond the financial statements, a good business valuation specialist can provide advice on whether you should pay down particular debts, get legal documentation in order or reduce overhead expenses. This can make your business more flexible as it goes into the exit process.

But what about your assets otherwise? If your accountant uses a standardized depreciation table for tax purposes, they're using a completely legal way to depreciate your assets. But if those assets are still in use by your business and have been completely depreciated, they still have value that is not being counted as assets. If you have assets that are being used hard and must be replaced before they are completely depreciated, you may still have them recorded as assets even though they have no value. A good business valuation specialist can help make sure your balance sheet reflects accurate values by recommending things such as an equipment appraisal.

But what about outside influences that can affect your business' appraised value? An experienced business appraiser may have a better feel for where the market is going and whether it is a good time to sell or if you should plan on waiting out a slump in the market to get the best possible value for your business. Do you have a new competitor in the region or in your particular specialty? A good business valuation specialist may be able to give you advice on how to further specialize or develop your unique selling point to make your business more attractive to a prospective buyer. 

By getting a business valuation for exit planning purposes, you can create a comprehensive exit strategy that provides you the opportunity to get the most from your business. If you're not currently working with a certified business valuations specialist who has experienced in your industry, please feel free to contact us today. We'd be happy to connect you with one of our experienced business appraisal specialists.

Transferring ownership of the family business requires care and planning to ensure a smooth change of leadership. One frequently overlooked tool that can make transitioning business to family members smoother is a company valuation. Learn how getting the family business appraised first can benefit not only the business itself but all relatives who work for the family company. 

Why You Should Take the Valuation of a Company Before Transferring Leadership

Imagine if you transferred the family business without getting a company valuation. Older relatives who held leadership positions might be expecting a large payout. Some may have assumed the payout was certain and planned their retirement lifestyle on it. When the valuation of the company is not fixed when leadership transfers, the grounds might be set for an intergenerational squabble if the new leaders do not feel the company has enough money to support these retirement payouts. 

If you instead seek a business appraisal first, a neutral third party would issue a value for the company that could act as a guide for all relatives. While the appraised value might fall short of the perceived value, the process of getting the business appraised can take some of the emotions out of the leadership transfer.

Once you know the valuation of the company, you can then gauge how much you can expect to inherit if you sell to the younger generation. Dividing the fair market value by the number of shareholders will give all owners an idea of the retirement income they can expect, and can help everyone plan for the next steps with accurate and timely information. 

The appraisal can also help manage expectations and allow the new leaders to chart a course forward with confidence they have all the facts needed to succeed. Instead of causing strife, the change of leadership can now strengthen family unity. 

Getting Family Business Appraisals for Tax Purposes 

Not only does it make sense to have the company appraised from a personal perspective, it is necessary to do so for tax purposes. The IRS requires that businesses that are not subject to a special provision be valued at "fair market value" for federal tax purposes when the business is transferring family leadership. Fair market value denotes the price that a buyer, not related to the willing seller, would reasonably pay for the business. Since most company owners cannot objectively determine fair market value, a business appraisal helps immensely. 

If the IRS were to ever examine the business transfer or audit company taxes, the appraisal can prove that the company's value was treated as "fair market" for the purposes of transfer. 

If you sell the business to your relatives for less than fair market value, the new owners could be penalized with gift or estate taxes. Selling for fair market value is the only way to avoid this and keep all business assets with the company. 

Planning Your Business Appraisal 

Now that you understand why a business appraisal is needed before transferring family business ownership, take action by finding an appraiser near you who understands your industry. Just like other professionals, appraisers have niches they work in. It is well worth the time spent to find an appraiser who understands your industry and your geographic locations, since these two variables can directly affect the company's appraised value. 

Business Valuation Specialists can help you find the right person to perform the company valuation, so you can move ahead with confidence.