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8 Ways of Valuing a Family Owned Business

April 26, 2012

Yesterday I gave a speech illustrating eight ways to value the same business.

 

Valuations of family owned and closely held businesses are confusing because of the varied reasons, uses and potential for litigation.  The eight ways discussed, illustrated and explained were fair market value for tax based transactions including gifts, estates and employee compensation, valuing a business for a divorce, selling the business, buying a business as an investment vs. buying the business to work in or for a strategic reason, valuations in an owners’ agreement and valuation for a personal financial plan.  Each has a different set of rules and methods and the valuations can vary greatly.

 

It is important to understand the differences and the reason each method is important for its purpose.  In some valuations, even the date of the valuation is an issue.  For example, the proper valuation date in a divorce could be the date the parties separated, date the complaint was filed or a later date depending on the individual circumstances.  This is further complicated if the gap between the earliest and latest dates is a couple of years.

 

The identity of the ultimate recipient of the valuation is also an issue.  If the person selling a business requests the valuation, will it be provided to the potential buyer, or used as a strategy guide in setting the starting and bottom prices?  Likewise if the buyer requests the valuation will he be provided with all the information needed to form an opinion including negative data?  That is where the investigative skills and experience of the buyer’s appraiser comes in.

 

In formulating an owners’ buy-out agreement it is necessary to determine a value where either party could be the buyer or seller.  There, a balance of the interests needs to be considered and the valuation might not be the value used if there were a sale or divorce, but it is the “right” value between the parties for the purposes of the agreement.

 

The hour and half program was a fast paced adventure in how owners and other interested parties need to look at the value of a family owned or closely held business.  An informative handout was distributed that can be downloaded on the WithumSmith+Brown website or The Accounting Daily.

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