Business Valuation (M&A / estate / ESOP)

Service description

A business valuation estimates what a company, or an ownership interest in it, is worth for a stated purpose. An independent appraiser applies accepted methods, typically looking at income, comparable sales and assets, and delivers a written report. The purpose matters, because a sale, an estate or gift filing, an ESOP and a lawsuit can each call for a different standard of value.

Common industries

Applies to privately held businesses in any industry, especially owner-led companies.

ROI

A credible, purpose-fit appraisal holds up with the IRS, courts, and counterparties; the intake is well-defined by purpose.

Benefit

A defensible valuation of a business or interest for a transaction, estate/gift planning, ESOP, or litigation.

Why get it

A private company has no market price, so an owner needs a defensible number before selling, gifting shares, setting up an ESOP or settling a dispute. The appraisal gives the owner, tax authorities and other parties a common basis.

When you benefit

Usually a one-time appraisal for a transaction or filing, refreshed when circumstances change. A company with an ESOP needs a new valuation every year.

What it costs

Typically a project fee.

When you pay

Providers usually charge a fixed fee set by the purpose, the complexity of the business and the level of report required. Valuations that may be tested in court or by a tax authority, or that need expert testimony, are often billed hourly. Updates are quoted separately.

Other costs

Legal and tax advice on how the valuation will be used, staff time to gather records, and expert testimony fees if the value is disputed.

Risks to know

A valuation built for the wrong purpose, or by an appraiser who is not independent, may not be accepted. For an ESOP, the law requires an independent appraiser for shares that are not publicly traded. A report that rests on weak records or aggressive assumptions can be challenged by a tax authority, a lender or the other side in a dispute.

When risks arise

Problems tend to surface when a buyer, lender or tax authority reviews the report, or when the other side challenges it in a dispute. A value goes stale if the business changes after the valuation date.

The process

The provider agrees the purpose, the interest being valued and the standard of value. It reviews the financials, the industry and comparable sales, then applies the income, market and asset approaches as appropriate. The business checks the facts in a draft, and the provider issues the final written report.

Your commitment

The business states the purpose and the valuation date, and provides financial statements, tax returns, ownership records and any agreements that restrict transfers of shares. Management should be available to explain the business and its outlook, and to check the facts in the draft report.

Documents to gather

• Financial statements and tax returns for recent years
• Ownership records, shareholder or operating agreements and any buy-sell agreement
• Descriptions of key customers, contracts, products and locations
• Recent offers, appraisals or share transactions

Helpful reading

• Close or sell your business — U.S. Small Business Administration
• 4.48.4 Business Valuation Guidelines — Internal Revenue Service
• How an Employee Stock Ownership Plan (ESOP) Works — National Center for Employee Ownership

Further research

• 26 CFR § 20.2031-2 — Valuation of stocks and bonds, including closely held stock, for federal estate tax (federal)
• 26 U.S.C. § 2512 — Valuation of gifts, for federal gift tax (federal)
• 26 U.S.C. § 401(a)(28)(C) — ESOP valuations of employer securities not readily tradable must be made by an independent appraiser (federal)
• 29 U.S.C. § 1002(18) — ERISA definition of adequate consideration, for securities not traded on a national exchange (federal)