Do I need a business valuation?Jean-Claude Desnoyers
Are you a business owner, an investor or a professional who wants to properly advise your client? Dealing with a Chartered Business Valuator could be the right choice to make. Here are some situations where it would be appropriate to consider a business valuation. If you are in one of these situations, refer to my article “Business valuation in 9 easy steps” and contact me.
1. Acquisition of a business
If you’re planning to acquire a business, it would be important to get a business valuation at the beginning of the negotiations. Doing it earlier in the process will allow you to have an idea of the amount needed to plan the acquisition and your application for funding, if necessary. The business valuation also provides you with information on the business model and the risks of buying it. It will also guide you for the negotiation strategy to adopt according to the difference between the value and the asking price. Also, getting the business’ value at the beginning of the transaction can determine if the current owner has a reasonable idea of its value. With a business valuation, you will have everything you need to decide if you want to continue the acquisition process and whether it’s possible to reach an agreement with the current owner.
2. Sale of a business
If you have a business and you are thinking of selling it, you should know that it is better to get a valuation 2 to 5 years prior to the sale. Why so early? To make sure that you will achieve your goals. With the help and expertise of a Chartered Business Valuator, you will be able to determine if the value is sufficient for your retirement plans and if it’s possible to increase its value before the sale. The valuation at the time of the sale will provide you with the fair market value (FMV) of your business, allowing you to determine the asking price. It will also allow you to justify the asking price and judge whether an offer is reasonable or not. As well, it will help you identify serious buyers.
In the case of family businesses, it is not uncommon to see a family member take over. It is also possible to transfer the business to a key employee in the organization. To properly determine a fair price for both parties, a business valuation is required. It will allow you to transfer the company at the fair market value and minimize potential problems with the tax authorities. To request the transfer to the FMV could also help to avoid potential conflicts in the future with other family members or key employees.
4. Tax planning and reorganization
A tax reorganization can be performed at any time, to reduce future income taxes. A valuation as part of a tax reorganization can also reduce the potential risks with the tax authorities. It can also help you determine the future steps to increase profits and therefore increase value.
5. Planning of insurance needs & Addition or withdrawal of one or more associates, partners or shareholders
When planning for insurance purposes or for the addition or withdrawal of shareholders it is important to do it right. To minimize the risk of conflict, it is important to agree on the business’ value for the stocks’ buyout clause and to determine the life insurance needs or disability. A Chartered Business Valuator can provide you with a business valuation, which will guide you to finance the shareholders’ agreement and to establish the buyout clause’s terms.
6. Separation or divorce
During a separation or divorce involving a business owner, a business valuation is required. The fair market value can be added to the balance sheet at the separation and date of marriage, if applicable. These amounts are necessary to determine the amounts to be separated between the spouses.
7. Final tax returns
Upon the death of a business owner, it is important to valuate the business before it is transferred to a related party. This value must also be included in the final tax returns of the deceased. Dealing with a Chartered Business Valuator will help you determine the value to quantify the tax payable and determine the best tax strategy. You will be able to have justified and reliable information to limit the risk of having problems with tax authorities.