Business Valuation and Why It's Important

What Is A Business Valuation and Why Is It Important

Glass Jacobson Financial Group Business Management, Tax Planning For Businesses 5 Comments

business valuation

What is a business valuation?

Business valuation is a critical component to your estate or business succession planning. Your business may be your largest asset, and if you plan to engage in either one of these types of planning, at some point you will need to determine the taxable value of your business interest. An incorrect value (i.e. one that is underestimated) could cause you to miss out on tax-saving strategies, while a value that is inflated could result in an investment of time and money in unnecessary planning.

Why might you need a business valuation?

Business may need valuation for any of the following reasons:

  • May be no active market to set price
  • Determine capital gain
  • Sale of business to family member or outsider
  • Transfer of business under buy-sell agreement
  • Transfer of business interest by gift
  • Estate tax purposes

What determines a business’ value?

There are multiple ways to determine the value of your business:

Income approach Value is based on expected income generation
Asset approach Value is determined on basis of business assets
Market approach Value is based on past sales of shares of this or a similar business

How do you determine the taxable value of your business?

The best way to determine the value of your business is to find a qualified appraiser. Determining the value of your business is not something you should attempt on your own, especially in light of the fact that the IRS could challenge your valuation. Glass Jacobson has a team of four Certified Valuation Analysts (CVAs) who specialize in determining  the value of a business.

A word to the wise: DO NOT use an old appraisal

You may have had your business appraised in the past for another purpose. As tempting as it might be, don’t use an old appraisal now. The purpose of the appraisal can affect the valuation assigned, and time can change the factors that go into the appraisal calculation.

The best time to start thinking about your business’s succession plan is a few years BEFORE you are ready to exit.

If you are starting to think about next steps for you and your business, contact us to ensure that your business is valued properly and you have a plan in place to mitigate taxes.

Our Certified Valuation Analysts are Ed Jacobson, Bart Scheffel, and Doug White.


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Comments 5

  1. Great article and very well explained. I believe in professionals so this is a very useful article for everyone. Many thanks for your share.

  2. I can see why a business valuation would be important. If I owned a business, I would want my son to inherit it, for sure. However, without a valuation, I wouldn’t know how much it was worth to him.

  3. Thank you so much for the tips! My husband’s office is merging with another practice at the end of the year. We weren’t sure if we should get the practice valued prior to the merge, but after reading this article and learning about the tax liability I am certain we will!

  4. Thanks for explaining that business valuation is an important component of an estate or business succession planning. Working with taxes has always been difficult to me, so I can see how business valuation services would help me out if I owned a business. If I ever do own a business, I’ll be sure to work with expert services and avoid using old appraisals.

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