Valuing a business is an expensive action. It can cost thousands of dollars. But it may be desirable or necessary in some situations.
Below are some good reasons you may need to get a business appraisal:
1. Gifting Interests to Children
You are permitted to annually give up to an exclusion amount ($14,000 in 2014) to each person you choose without any federal gift tax. Gifts in excess of this limit are taxable or reduce the amount you can transfer tax free at death.
When transferring shares in a corporation or interests in an unincorporated business (e.g., limited liability company), how to do you know whether the gift is below this dollar limit? An appraisal at, or near the time of, the transfers will determine what these gifts are worth and help you stand up to any IRS challenge on valuation.
2. Sharing Ownership with Investors
How much should an investor pay for an interest in your company? It depends on what the company is worth. In order to set a price for an investor to buy into your company, a business valuation must be made.
While value can be set using certain key metrics (e.g., a multiple of earnings), an appraisal may be preferable (e.g., if you’re bringing in investors who are acquiring a substantial interest in the company).
3. Creating an ESOP
If you want to share ownership of your corporation (whether C or S) with your employees, you can use an Employee Stock Ownership Plan (ESOP). According to the National Center for Employee Ownership, currently 7,000 companies have ESOPs covering 13.5 million employees.
While publicly-traded companies can use their market values for the ESOP, privately-held corporations need an appraisal to know how much they can deduct for the contribution of shares to the plan and how much employee-participants can receive annually.
4. Making Charitable Donations
You may want to benefit a favorite charity using your business as the source of the gift. You don’t have to be a public corporation to do this. An appraisal is mandatory when the deduction is more than $5,000.
Several years ago, one of the owners of Jackson Hewitt, the tax preparation firm, overlooked this rule and lost his deduction for a donation to charity of some of his stock in the firm.
5. Getting Divorced
Your business interest may be a significant part of a property settlement during a marital dissolution. If you live in a community property state, your spouse may be entitled to one-half.
If you live in a non-community property state, the asset is subject to equitable division, which is based on how much the asset is worth and what the parties can agree upon or the court orders.
If your business is sued and loses, insurance may not cover the award that’s owed. Obtaining an appraisal for the business can help you make decisions: Selling interests to raise cash for the debt or closing the business entirely.
7. Selling a Business
What should the sale price be?
That depends on what your business is worth when you put it on the market. At the very least, an appraisal can help you make an informed decision about whether to sell and what to ask as a sale price.
8. Estate Planning
Whether you need to do tax planning for your estate depends in part on what your business is worth. If the value of your interest in your business, plus the value of your other assets, exceeds the federal estate tax exemption amount ($5.34 million in 2014), you likely want to work with tax professionals to craft a plan that minimizes your estate’s tax exposure and maximizes what heirs will keep after tax.
Even if your estate is not large enough to raise federal estate tax concerns, the laws in your state may still be a concern. For example, New Jersey’s exemption amount is $675,000. Estates above this may be taxed, so planning is warranted.
9. Post-Mortem Planning
If you co-own your business and have thought ahead, you’ll have a buy-sell agreement in place. This contract details who acquires your interest after death and what will be paid for it. Typically, a buy-sell agreement has a formula that’s used to determine the value of the company so that the amount of your interest can be figured.
Some buy-sell agreements, however, rely on an appraisal at the time of death to make this determination.
10. Just Because
An owner may want a business appraisal to help decide the next move. While the investment in an appraisal is considerable and not undertaken lightly, an owner at a crossroad may need the information to decide whether to sell, expand, close up, or go in another direction. It may be an action that leads to growth and future success.
If you need an appraisal of your company for any reason, use a reputable appraiser knowledgeable in business appraisals. Some options are:
- American Business Appraisers
- American Institute of CPAs’ Accredited in Business Valuation
- American Society of Appraisers
- Institute of Business Appraisers
Clipboard Photo via Shutterstock
More in: Buying or Selling a Business
I didn’t know that getting an appraisal would mean a whole lot and would cost that much. I don’t really see the value of business appraisal until I have read this article so thank you for this.
Thanks, Aira – glad to hear this article helped you.
I can’t think of anyone crazy enough to undergo the stress, inconvenience, and cost of a business appraisal “just because”, but I guess there is always someone crazy enough.
You’re right – business valuation is expensive and intrusive – but priceless when you need it. I can also give you valuable insight as to the factors that influence the value of your business.
Not all valuations are this demanding however. There are ‘lower level’ valuations that can give you a good indication of what to expect for your business value. Check out our Calculation of Value at mycompanyvalue.com.
Brian Murray CPA/ABV, CVA
Very good articular Barbara, thank you. I believe Brian is right. There are other methods out their, so it is always good to give yourself the time to research the best options for you.
I had no idea that a business appraisal will help you to understand how much a company is worth as an investor. My brother is thinking about selling his company, and we are looking for advice about what to do. I will let him know about your recommendations to choose the right business appraisal.