REASONS TO GET A BUSINESS APPRAISAL
There are many reasons why a business may need to be appraised. Here are the most common reasons.
Partnership or Shareholder Agreements
Agreements between partners or shareholders, often a buy-sell agreement, should be based on a business appraisal rather than some simple formula. Often, an appraisal is performed when a shareholder, such as a professional, is buying into a business or professional practice or when they want to sell out and move on.
Marital Dissolutions (Divorce)
During a divorce, a closely held business is usually a significant marital asset. Often, an appraisal is done by an appraiser hired by each spouse however, in some cases, one appraiser is retained by both parties to prepare an objective value acceptable to both parties. Each appraisal should be totally objective regardless of which side has retained the appraiser—however, in practice this is often not the case.
Estate Planning for Gifts or Inheritance
Interests in closely held businesses can be transferred during the lifetime of the owners to minimize the estate taxes that will be due on the death of the owners. Business appraisals are typically required and must be filed with the Internal Revenue Service along with the gift or estate tax returns. Often, these reports are closely scrutinized by the Internal Revenue Service. For this reason, it is important to retain a highly qualified and experienced business appraiser to prepare the needed valuation.
Family Limited Partnerships or Limited Liability Companies
These entities are often used as estate planning devices for owners of closely held businesses including farms and ranches. Minority interests in the company or farm can be gifted to relatives or others while the owners still maintain control of the company or farm. Typically, discounts apply to the minority interests that are gifted thus saving gift and/or estate taxes. Your attorney can help you structure the entity that is appropriate for your situation. We can do the business valuation needed to quantify the appropriate discounts.
Employee Benefit Plans
Transferring a portion or all of the ownership of a business to employees is a complex area. Typically, called Employee Stock Ownership Plans (ESOP), employer stock is contributed to the plan instead of cash. Department of Labor rules and regulations apply to ESOPs. The stock must be valued by an independent appraiser annually.
Litigation Issues involving Lost Profits or Economic Damages
These types of cases need a business appraisal to establish the amount of damages that occurred. Often, the business must be valued twice. Once, at the present time and the other as if the action that resulted in the problem had never taken place. The difference represents the amount of damages.
Dissenting & Oppressed Shareholder Litigation
Stockholder disputes arise from a variety of reasons. Often, the problem is a minority shareholder that is not receiving any dividends or other return on their investment in a closely held company but watches the majority owner take huge amounts of money and benefits out of the company. In this type of litigation, a competent business appraiser and a comprehensive valuation is a necessity.
Mergers and Acquisitions
Business valuations are often performed when one company wants to acquire another. Typically, each business is valued as a stand alone. Then, the two businesses are valued as if combined using anticipated synergies from the merger. This process gives each firm guidance on how much can and should be paid for or by the other.
There are many other reasons for a business appraisal. Some of these include: Allocation of Purchase Price, Liquidation or Reorganization of a Business, Conversion of a "C" corporation to an "S" or SubChapter S corporation, Financing, Ad Valorem Taxes, Incentive Stock Options, Initial Public Offerings, Insurance Claims, Charitable Contributions, Eminent Domain Actions, etc.