By: Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC
In last week’s blog, we discussed buying and selling businesses from the legal perspective. Attorney John T. Carter mentioned that business valuations were an important part of the process. This week, we have a guest blogger, CPA and Certified Valuation Analyst, Cory Lee to discuss what’s involved in business valuations. As you’ll note below, business valuations have many uses beyond selling a business.
Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC
What’s your business worth?
By: Cory Lee CPA CVA
Every year, thousands of small businesses are bought or sold. As a small business owner, maybe you have pondered these questions. How much is my business worth? Can I sell it for $xxx,xxx? When is the right time to sell my business and retire?
There are many unofficial ways to value a business; you could compare the sale price of a similar business, multiply revenue or sales data to arrive at a fair price, or pick a number based on nothing more than how much you hope to receive. Although some of these methods may get you close to the asking price you want, the actual market for your business may dictate an entirely different amount. Much like buying a home, everybody has an opinion of what the house is worth; however, only a qualified real estate appraiser can justify a purchase price.
Like appraising a home, the best way to get an accurate estimate of your business’ value is thru a business valuation. A business valuation establishes a value of a partial or entire interest in a closely-held business or professional practice. The factors taken into account are both quantitative and qualitative, because both the tangible and intangible factors related to the business are being valued.
Determining a value of your business can be done at different times in your business’ life and for different reasons. One instance when a business valuation should be done is during your estate planning process, long before you plan to retire. Having a base knowledge of what your business is worth can help you determine what you can do with it in the end. (ie. sell a piece, gift pieces to relatives, or sell the whole thing). Having knowledge of what your business is worth can also help you figure out ways to increase its value along the way, thereby increasing your nest egg during retirement. Getting a business valuation should be the first step in any estate plan.
Business valuations can also be used for:
- Purchase or sale of closely-held businesses or interests
- Gift tax and estate tax valuations
- Analysis and advice concerning pending offers to purchase
- New partner buy-in (i.e. physician buying-in to medical practice)
- Court appointed valuations in disputes
- Minority shareholder disputes in litigation
- Divorce (equitable distribution)
- Business damage asset determination
- Solvency analysis and fraudulent conveyance
- Reasonable officer compensation determination in disputes with the Internal Revenue Service
Cory Lee, CPA, CVA, of ShindelRock, specializes in serving clients in sectors such as medical practices and real estate, including construction, residential, office building, industrial buildings, and land development. Additionally, he provides tax research and advice to clients and oversees the preparation of business valuations, as well as individual, partnership and corporate income tax returns. Cory is a Michigan State University graduate and holds an MBA as well as a Master’s of Finance from Walsh College. For more information or assistance, please contact Cory Lee at 248-855-8833 or visit his blog at www.viewfromtherock.com.
Lori T. Williams is a 23 year attorney based in Birmingham, MI. She owns a legal referral and legal consulting business called Your Legal Resource, PLLC. She assists individuals and small businesses in need of legal advice or representation by connecting them with the right legal specialist for their situation. She also provides consulting services for attorneys and other professional service providers on how to generate more business through effective branding, marketing, networking, and by creating strategic partnerships. For more information, visit www.bestlegalresource.com.