Purposes of a Business Valuation

In the last issue (#52), we highlighted the need for Contingency Planning – Facing Your Own Mortality. In this issue we will discuss the Purposes of a Business Valuation.

"Everything has its beauty, but not everyone sees it." Confucius

Purposes of a Business Valuation

There are four primary purposes for business valuations, and multiple reasons for each purpose, that may prompt owners to obtain a business valuation.

The four primary purposes are driven by:
1) Planning
2) Taxation
3) Transactions
4) Disputes.
The reasons for business valuations are categorized below under their potential purposes (many reasons have multiple potential purposes):

Planning/Taxation/Transaction Purposes

  • Exit strategy planning
  • Succession planning
  • Tax planning
  • Estate valuation/planning
  • Gift valuation/planning
  • Family business ownership transfer
  • Selling a business
  • Buying a business
  • Raising capital for equity capital injection
  • Corporate reorganization for growth
  • Merger
  • Establishing an ESOP
  • Change in corporate entity for tax purposes- (for more information read this article: Issue #65 – Achieving a Partial C-Corporation Tax Benefit)
  • Establishing the value of “personal goodwill” for tax purposes in a business sale
  • Buy/sell agreements

Planning/Taxation Purposes

  • Personal financial planning
  • Life insurance purposes

Transaction Purposes

  • SBA-required business loan valuations for most business acquisition financing
  • Lender’s requirement to obtain business financing for various purposes

Dispute Purposes

  • Partnership disputes
  • Shareholder disputes
  • Family disputes (including divorce)
  • Litigation support
  • IRS dispute settlements

Internal vs. External Use

Further, the purpose/reason for the business valuation can be for ……