It depends on what ‘it’ is.
Why do I Ask?
Because you came to me and said:
- You wanted to buy out a business partner, become a partner, take on a partner, or sell your business outright
- Or you need a clear-cut agreement with your fellow owners addressing buy-sell arrangements, including triggering events and terms of payment
- Or you’re updating your estate plan and your business represents a major asset that could tip the balance between a taxable and a non-taxable estate, or comprise a specific bequest
- Or you want to create a family limited partnership and give away shares of ownership in a business or other property, including intangibles such as intellectual property (IP) to your family members
- Or you’re getting divorced and you want to know what you’re entitled to in a property division involving a family business interest that you own, or your spouse owns
- Or a family member has died owning one or more business interests, including active and passive (limited partnership) shares, and the probate court requires a valuation
- Or you’ve suffered financial damages due to patent or other IP infringement, or personal injury or theft, or you’ve been sued for damages and you’re embroiled in litigation
- Or you want to buy or sell a commercial rental property that is fully leased to quality tenants, or is mostly vacant and the tenants don’t pay.
So there are a lot of or’s to consider, along with several ifs, ands, and buts.
Let’s say someone has approached you to buy your business but you don’t agree with the proposed price. If it’s an unsolicited buyer perhaps you’ll want to determine a current value, and devise a plan to grow it to the desired amount. If it’s a strategic buyer such as a competitor, understanding how they evaluate you as a potential acquisition may enhance the selling price. If it’s a key employee you may want to discount the transfer price, or tie ownership to achieving growth in value. But if it’s a family member, seller beware. Fairness is in the eye of the beholder and can cause enormous divisions in a family context.
Business valuation is more of an art than a science, but there are a number of accepted methodologies that should be considered. They essentially boil down to asset-based and income/cash flow-based approaches. How do you know which is most appropriate in your particular situation? It depends.
A professional valuator will understand your circumstances and use them to estimate a reasonable value for your business assets. Not all valuations can be driven by the time-honored and IRS-approved tenet of a hypothetical buyer and a hypothetical seller.
If you or someone you know needs a business valuation, we’d be happy to meet for an initial consultation.