Legal Blog
Business Valuations Are Not One-Size-Fits-All
A client contacted me about a business acquisition he was considering. The company whose business he was thinking of buying had had a valuation (appraisal) performed several months before in connection with a loan that the business had sought. Could that prior valuation be used by my client in determining a price for the purchase?
I could understand why my client would want to use the earlier business valuation. After all, valuations can be expensive, and the process of having one made can be disruptive to a business.
However, business valuations are like fine clothing – one size does not fit all.
Business valuations can be done for multiple reasons: satisfying an insurance company’s requirements, supporting a value on a gift tax return, determining values for estate planning or a divorce, or, as in my client’s case, obtaining a loan and setting a sale price for a business.
In some cases, a valuation can be used for a different reason than the one for which it was originally used. But, in other cases, it cannot.
For example, if an active business owner is getting the valuation because she is selling her business and plans to move to Tahiti, the valuation of the business will be reduced because one of the business’ most valuable assets, the owner, will no longer be a part of the business. But, if the owner is getting the valuation only as part of getting a loan, the valuation of the business will not be reduced – because the owner is staying on.
Different reasons – different valuations.
So, before trying to take advantage of an existing business valuation, it is important to consider the reasons for the valuation and whether the factors involved in the valuation are consistent with your needs. It’s a good idea to first check with your counsel or an independent appraisal professional.
ABOUT BRIAN HUNDERTMARK
brian.hundertmark@offitkurman.com | 240.507.1750
Brian J. Hundertmark has more than 30 years of experience representing the needs of his clients. They rely on him for their estate planning, business succession, and asset protection needs. He designs personalized estate plans to help minimize the burden of gift and estate taxes while protecting assets from potential creditors. Brian makes estate planning as timely and painless as possible.
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