Enterprise Services, Inc. Business Transitions and Valuations
Business Valuation Articles

The "Value" of Obtaining a Business Valuation for a Closely Held Company
By Scott D. Miller, CPA/ABV, CVA

Originally published in Small Business Times, a southeastern Wisconsin area newspaper, November 1996.

The classic owner of a successful closely held company is driven to make the firm survive. The common company life cycle includes several phases. First, is the new company launch accompanied by years of struggling when sales and products are uncertain at best. Resources during this phase are "thin", which likely means the company operates from a basement or garage.

The next part of the cycle is the resource critical mass stage. During this period the Company passes the essential need to survive and actually begins to grow. The basement or garage is replaced with a rented facility with a legitimate business address. Staff is added, and the challenge of making payroll is always present.

Finally, a successful company emerges that has a significant asset base, a number of employees, and it provides a very comfortable life style. At this point the entrepreneur often sits back and wonders what it must be like to work for someone else. After passing the most demanding challenges of the free market system, this business owner is a winner. It is my experience that many successful business owners are often so close to the operations of the company, that they loose a critical perspective. That perspective is the need to adequately plan for the succession of the company.

The Value of the Business

After years of being close to the operations of the business, the owner often has no real idea of the company's worth. In the inflated world of the 1990's it does not take long for a business to have assets worth hundreds of thousands of dollars. Even though those assets are typically offset by trade payables and bank loans, there may be significant real value. The value represented by the company must be considered with all the other assets of the business owner, including personal resources.

When the total asset package is viewed in this light, it may be substantial. It includes such things as real estate, automobiles, investments, other personal property and the business. The business is frequently the largest single asset. Knowing the value of the company is very helpful in the planning process.

Ultimately, the business owner is very concerned about minimizing taxes. The years of sacrifice and struggle to build a successful company also mean that you have a silent but very real partner, the tax collector. Paying taxes is a fact of life, but steps may be taken with proper planning to minimize the obligation. Without planning, the taxes that you or your family will pay is likely to be maximized, not minimized. Having a valuation of the Company by an established professional is helpful on many fronts.

Reasons for the Business Valuation

There are countless reasons for having a business valuation, and a few of the most common ones are listed. Perhaps one of the best reasons is related to achieving the goals of the business owner. The owner typically has spent a career building the business, and has a vision for the company. That vision usually includes seeing the company survive as it passes to the next generation of owners.

To begin considering this point it is helpful to gain a perspective of scale, how much is at stake. Identifying the overall value is essential for tax planning. If the business ever becomes subject to estate taxes, those rates are very high. Estate taxes begin at close to 50% and increase from that point. This tax is imposed after all the appropriate income taxes have been paid for years.

Knowing the value of the company means that a plan may be put in place to transfer assets in a timely manner to reduce or eliminate such taxes. It takes time, often years, to implement a succession plan intended to minimize taxes. This approach assumes that the business stays in the family. Making timely gifts of appropriate assets to family members may be a viable strategy. The good news is that with the high tax rates, the planning that goes into saving taxes is worthwhile.

When the family does not produce an obvious successor, options should be considered. The business owner has a wide range of alternatives, but enjoying those options means that planning must be done. The Company may be passed to a third party, a partner, or the employees (by forming an Employee Stock Ownership Plan or ESOP) to mention a few possibilities. Establishing a realistic value for the business is the first step in determining a business plan.

Another reason for obtaining a business valuation is related to the high rate of divorce. Unfortunately, many business owners will be involved in marriage dissolutions. The divorce actions may become highly contested and emotional. Having an objective business valuation by an independent professional is one step in the process of resolving a very difficult situation.

Whatever the reason for the valuation, it is important to recognize that there are rules and regulations that apply to different types of assignments. Engaging an experienced professional will help you define and achieve your goals.

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