When starting a business, one of the last things a new owner might think about is, “What’s my business worth?” As a business grows and matures, there are numerous reasons why a business owner should know and understand the value of their business. Unlike publicly traded stocks, a closely held entity is not listed on a stock exchange and isn’t updated in real-time. This can lead to a business owner asking the question, “What is the value of my business?”
Some of the most common reasons a business owner should know the value of their business include:
• Estate planning and gifting
• Business succession planning and buy/sell agreements
• IRS or other regulatory body regulation
This article will detail the first two common reasons outlined above, along with available options for conducting business valuations.
Estate Planning and Gifting
As of 2024, the estate tax exemption is $13.61 million for an individual and $27.22 million for a married couple. Knowing these amounts is crucial, especially if you wish to pass a family business from generation to generation. As the current tax code stands, these elevated estate tax exemptions are set to sunset at the end of 2025 and revert to their 2017 values, indexed for inflation, which is around ½ the current value. With future uncertainty and potentially a reduced estate tax exemption, it’s important to complete a business valuation as part of a comprehensive review of your net worth and estate plan.
Business Succession Planning and Buy/Sell Agreements
Without proper planning, a business owner runs the risk of selling significantly under fair market value, especially if the business needs to be sold in a short period of time. It is imperative when beginning a business, especially if not 100% owned, that proper buy/sell agreements are reviewed and incorporated into the business operating agreement. By having these agreements already in place, each owner agrees to value the business in a certain manner. The operating agreement will typically detail how to value a death of an owner, an owner buyout, and other specific factors which could include specific valuation methods and any applicable terms.
Available Options for Business Valuations
Now that we have reviewed common reasons for a business valuation, what options do business owners have that are available to them? As with most financial-related items, different levels of service can be performed.
There are generally two reports that valuation analysts will issue when performing business valuation services. The first, and most detailed, is a conclusion of value. This would also be considered a full valuation and values a business using three different approaches (income, asset, and market). Once all three methods have been analyzed weighting is placed on each method and a value is determined. Conclusion of values are typically used when valuing a taxable estate, significant gifting of business ownership, or if a business wants all valuation approaches utilized.
The other common report is a calculation of value. In a calculation report, the business owner chooses one or more approaches they wish to have valued and no significant industry ratios or economic information is included in the report. A calculation of value report is typically used for owner disputes, buy/sell agreements, business succession, and when gifting a lesser amount of business ownership. A calculation report can be especially useful in business transactions as it can help set a starting point for discussion and can be performed in a shorter amount of time. Additionally, this can serve as a tool to aid in preparing for exit and increasing the value of your business.
Tax time is a great opportunity to go over your business succession plan and review your company’s operating agreement when working with your tax professional.
HBE Is Here to Help
Understanding the value of your business is a crucial aspect of effective business management and planning. Whether it’s for estate planning, business succession, or financial transactions, the knowledge of your business’s worth is important in making informed decisions that can impact the future of your company. At HBE, our experts specialize in providing comprehensive business valuation services tailored to meet your specific needs. Our team is ready to assist you in understanding the value of your business and the available options for valuation. Please contact our Valuation Specialty Team to learn more about how we can help you.