If you are looking to buy into a small business or you are already in business then you need to understand business valuations, and when they are required. There are three main reasons why you would require a business valuation:
Internal restructuring is where you have grown your business to a point where the structure needs to change to cope with external parties interested in the business. A typical example of this is where a business runs under a discretionary trust that grows significantly and then banks and/or external equity providers can take that business to the next level, in other words from a small to medium size business. This would involve the sale or rollover of that business to a company or unit trust which would require a business valuation to calculate the goodwill going into the new entity and any capital gains tax that may result.
Another example of internal restructuring is where Mum and Dad, who have say three children, pass the business on to Child Number 2. Mum and Dad’s two other children who aren’t in the business need to be dealt with fairly. To make sure the transaction is commercial for the whole family and for estate planning purposes a business valuation is required.
External Transaction Requirements
Many external transactions in business require a valuation. For example business owners who are considering selling their business require an objective opinion of value to make their plans. Business valuations also provide all involved parties with peace of mind during a transaction, as final values can either justify a buyer’s investment or cause them to reconsider. Banks and equity financiers may require regular business valuations as part of their servicing requirements and return on investment calculations.
Another common external transaction that will require a valuation is a buy/sell agreement. This agreement allows a partner or shareholder in a closely held business to purchase the interest of another partner or shareholder who withdraws from the business. Agreements often include the need for an independent appraisal to determine a per-share price. Business valuers typically work in conjunction with lawyers when drafting the valuation portion of these agreements.
The third category of requiring a business valuation is in legal disputes. As above with the buy/sell agreements, shareholders can have major disagreements which may trigger them being diluted as a shareholder or being voted out of the business. A resolution of this type of dispute will almost always require a business valuation whether this is written into a buy/sell agreement or not.
A dreaded divorce is also an obvious reason for a business valuation. Divorce proceedings are often complicated by ownership of a closely held business, which must be valued along with the rest of the marital estate.
If you have a life event that requires a business valuation, we at GGA can offer you fair market valuations using the most appropriate method for your business.