Money Matters

What’s It Worth? Four Reasons a Business Owner Should Have a Valuation

25 Oct 2019 by: Brian Matter 


Business valuations have been in the news recently thanks to WeWork’s Initial Public Offering (IPO) struggles.  The company was touted as the “next big IPO” with a valuation of $47 billion.  As more information about their business practices came to light, the valuation plummeted, and the company failed to complete the IPO.  As of this writing, the company is supposedly valued below $8 billion with an urgent need to shore up its finances before it runs out of money.  It was drastic change in a short period of time, which no doubt hurt the company’s investors.

Most business owners will never have to worry about having a billion dollar valuation.  However, they should still monitor the value of their company.  While there are many reasons to complete a valuation of a company, here are four top considerations.

Succession Planning

From the moment a business owner starts a business they should be thinking about how they will ultimately transition out of the business.  Business succession may be accomplished by gifting the ownership to family, selling to employees (which is how CCMI completed our transition) or selling to third party strategic buyers.  In each scenario, a business owner will need to know what their business is worth to guide the negotiations and tax planning.  A valuation will allow a third party to help level expectations that either the buyer or seller may have based on the assets, liabilities and cash flow of the business.  Even in a family succession of a business, you will want to complete a valuation.  Any gifts to family will likely count against the lifetime gifting exclusion, which will need to be formally documented for tax and estate planning purposes.

Estate and Gift Tax Planning

As long as federal (and some state) estate taxes remain in place, gifting of any portion of the business should be based on a formal valuation to provide support if the IRS challenges the transaction, either while the business owner is alive or after your transaction.  Additionally, you may need a valuation not only to file an estate tax return, but also to provide guidance for the executor to satisfy the terms of a decedent’s will.

Buy/Sell Agreements

If there is more than one owner of a business, then there should be a buy/sell agreement to set the terms under which one owner can acquire the interest of another owner in the event of retirement, death, disability, or disillusionment.  These agreements will often include a designated price or formula to determine the price for the acquisition, and they are generally going to be based on a formal valuation to ensure a fair value for both parties.

Insurance Purposes

Business owners sometimes obtain a valuation to determine the necessary amount to cover their business interest if something were to happen to them.  This amount of coverage is then purchased as “key person insurance.”  If something happens to the owner, the insurance value would pay out to a beneficiary to continue the owner’s role or to buy themselves out of the owner’s role.

Another reason to obtain a valuation for insurance purposes is to make sure the business owner has sufficient cash in their estate in the event that the estate needs to pay taxes.  If there is insufficient cash at the owner’s death, the business interest may need to be sold to create the cash needed which may adversely impact the business.

There are many other reasons to obtain a valuation, which may include securing a loan for the business, setting up an employee stock ownership plan (ESOP), an ongoing marital dissolution, determining allocation of purchase price for taxes, or the sale/merger/acquisition of a company.

If you own a business and find yourself asking “what’s it worth?” as it relates to any of the scenarios outlined above, then it is likely time to complete a formal valuation.  CCMI’s CERTIFIED FINANCIAL PLANNERTM professionals regularly work with valuation experts when helping business-owning clients plan for some of these challenges.  Give us a call if we can be of assistance in helping you determine if you need a formal valuation of your business.

CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
How can we help you?

As a CERTIFIED FINANCIAL PLANNER™ professional, a Certified Private Wealth Advisor® designee, a Certified Exit Planning Advisor®, and a business owner, Brian specializes in helping business owners navigate their financial lives. In addition to his role as principal and owner, Brian guides clients in investment selection, risk management, estate planning strategies, succession plans, retirement options, and generational wealth planning and also serves as CCMI’s Chief Compliance Officer.

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