When are Business Valuation Services Needed?

We have seen a tremendous increase in the need for business valuation services in recent months as regulatory requirements and market dynamics continue to evolve. Business owners and investors are faced with complex challenges – succession and exit planning, changing regulatory requirements, unpredictability of tax rates and tariffs, and a volatile M&A market driven in part to interest rate uncertainty. In this environment, understanding the true value of your business is essential for making informed, strategic decisions.  Is now the right time for a business valuation?

What is a Business Valuation?

A business valuation is the process of estimating the value of a business by analyzing financial performance, the nature of the business, relevant risk factors, the industry in which it operates, changing economic and market conditions, and the influences of competition. 

WM WISDOM:
It is highly recommended that you engage a certified professional to prepare the business valuation to ensure the work follows professional standards and is defensible in front of auditors, the Internal Revenue Service (IRS), and in a court of law.

When is a Business Valuation Necessary?

Below are some common reasons one might need a business valuation:

• sale or purchase of a business
• adding new shareholders or partners
• the termination of shareholders or partners (retirement, disability, death or early termination)
• gift and estate tax planning
• financial reporting
• litigation

Sale or Purchase of a Business

The sale or purchase of a business is one of the most common events that requires stakeholders to consider the impact of valuation.  A business valuation can assist you in deciding if the price is right.  A business valuation can also be prepared during a company’s transition period leading up to or following a transaction.  For instance, the addition of new partners or termination of a partner’s interest may warrant a valuation exercise. Business owners can also work with valuation professionals to understand key value drivers of their business and strategically focus on areas that are accretive to value leading up to a liquidity event.

WM WISDOM:
In any of the above situations, it may be necessary to value the business in accordance with terms of a buy-sell agreement or to establish the value of a company to address how business owners will think through a potential liquidity event down the road.

Gift and Estate Tax Planning

For most small business owners, the most valuable asset they own is their business. A valuation for an estate tax filing or for a gift is subject to IRS review and must meet certain requirements.

As President Trump’s One Big Beautiful Bill Act (OBBBA) permanently increases the federal estate and gift tax exemption ($15 million per individual; $30 million for married couplies), continued opportunities for strategic tax planning exist. The impact of legislative developments should be considered as part of the valuation engagement.

WM WISDOM:
While a valuation can be used to allow strategic gifting to maximize exemptions and minimize taxes, an inaccurate valuation can lead to IRS audits and penalties.

Financial Reporting

Certain transactions and financial reporting requirements can trigger the need for a valuation. The following accounting standards will often require a business valuation for financial reporting:

• Purchase price allocation (ASC 805)
• Goodwill impairment (ASC 350)
• Mark-to-market valuations (ASC 820)
• Stock-based compensation (ASC 718)

Under each of these accounting requirements, the value of a business or specific asset should be determined with the help of a valuation professional. A supportable valuation ensures that financial statements accurately represent a company’s financial position.

WM WISDOM:
If your business has completed an acquisition or experienced a significant change in financial performance, talk to a valuation professional or your accountant to determine if any financial reporting valuations will be required for the fiscal year.

Valuations for Litigation

You may also need a business valuation for litigation purposes. Litigation involving the following is most common:

• a partnership dissolution
• shareholder disputes
• damages
• divorce

In each of these scenarios, the value of the business might be the primary point of contention. A professionally prepared business valuation should help reach a suitable resolution for all parties involved.

Finding the Right Team to Perform a Business Valuation

Here at Wouch Maloney, our professionals include Certified Valuation Analysts (CVA) who are willing and able to help you prepare a business valuation for any purpose. In addition, one professional also holds the Accredited in Business Appraisal Review (ABAR) credential, awarded by the National Association of Certified Valuators and Analysts (NACVA), which allows him to perform the review of a business valuation prepared by another professional.

Questions?

If you are thinking about retirement, selling or buying a business, gifting, or any other life changing activities that may require a business valuation, please call 215.675.8364 or email us to speak with a member of our valuation team. We look forward to helping you with your business and personal financial needs.

Jake Libucha, Director of Business Valuations, contributed to this article.

DISCLAIMER: All communications by Wouch, Maloney & Co., LLP intend to provide general information, as of the date of the communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. Please be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.