Closely held business valuations are a complex process. You must understand the nature of business and determine which valuation method is most appropriate. Clients that own an interest in a closely held business will have several different reasons for needing business valuations.
- Succession Planning, Estate & Gift Tax Valuations
- Charitable Contributions
- Potential Sale
- Trust Compliance (Regulation 9, Distribution)
- IRA Compliance (Form 5498, Conversion, Failed Asset)
- Personal Financial Planning
- Other Valuation Situations
Three approaches have been developed for conducting business valuations – the market approach, the income approach, and the cost approach. The valuation method depends heavily on what type of business they own.
The Market Approach
The Market Approach is based on the valuation principle of substitution. The approach develops value measures based on prices for comparable interests. Two techniques are typically employed in the market approach: the guideline publicly traded company method and the guideline merged and acquired company method. The guideline companies’ market approach method utilizes financial and market information regarding publicly traded securities of companies engaged in business pursuits similar to those of the Company. The market approach merged and acquired (transaction) method utilizes market transaction information regarding privately held companies engaged in business pursuits similar to the Company’s.
The Income Approach
The Income Approach typically employs two techniques – a discounted cash flow technique and a capitalized earnings technique. A discounted net cash flow analysis provides an indication of value based upon the present value of anticipated future cash flows, discounted at an appropriate present value factor reflecting the risk inherent in the investment. The capitalized earnings technique applies a capitalization rate to a single period economic measure to convert that measure to a value indication.
The Cost Approach
With the Cost Approach, the underlying assets of the company are considered individually, and the sum of these assets minus the stated liabilities results in an indication of the fair market value of stockholders’ equity.
When valuing a business, it is important to work with a qualified appraiser. Apart from our tolimonitor trust-owned life insurance solution, ITM offers valumonitor to address the significant compliance and reporting challenges professional trustees face today with valuing closely held business interests. Our team of qualified appraisers derives an unbiased opinion of value intended to help fulfill your fiduciary obligations, request a consultation to learn more about how we can help you with your valuation needs.
