What Is A Business Valuation, And How Is It Used?

Business valuation is the process of assessing the current financial value of a business in its entirety or, in some cases, the financial interest an owner and/or partner has invested in a business. Business valuations are typically conducted by forensic accountants, a highly specialized field of business accountancy, and are required for business sales, estate evaluations, divorce litigation disputes and other similar legal and financial scenarios.

What Is A Business Valuation, And How Is It Used?

In most cases, business valuations require extensive research into a business expenses, employee wages, product or service value, financial statement and many other factors. Current, local economic climate must be taken into account, and, in the case of jointly owned businesses, owner interest must be calculated. Certified forensic accountants (CFAs) are highly educated business accountants who specialize in business accountancy, IRS taxation and financial markets. Most business valuations require the services of a forensic accountant, or CFA.

What Is A Business Valuation, And How Is It Used?

While business sales are a common purpose for business valuations, there are a number of other legal and financial situations which require or benefit from a thorough business valuation.

What Is A Business Valuation, And How Is It Used?

Business Valuation for Sale & Purchasing
If a business is going to be put up for sale, both the business owner and the future buyer need to come to an agreement on the business economic value. While some business owners and buyers are content to use the figure “two times the business annual revenue” as a rubric to determine the business financial value, this is only a median and is often grossly inaccurate. The value of a business typically encompasses far more than annual revenue, including business assets, equipment value and owner income. Having a forensic accountant perform a professional business valuation of a business ensures the buyer and seller have an accurate, objective estimate of the business worth.

What Is A Business Valuation, And How Is It Used?

When a business is jointly owned, pre-sale business valuations become even more crucial. Business partners and joint owners want to determine they are receiving their fair share of the business assets, so business valuations are necessary.

Divorce Litigation Disputes
If a business was started or purchased after a couple was married, both spouses are entitled to an even disbursement of that business assets after divorce. In divorce cases in which business ownership is involved, business valuations are highly necessary, since the valuation will determine how much monetary value each spouse has vested in the business.

Estate and Gift Taxation Disputes
Business valuations can be essential in inheritance situations wherein heirs are entitled to a percentage of a business which belonged to the deceased. Similarly, when a business has been gifted to a friend or family member, the IRS is entitled to a percentage of that gift, and the only objective way to determine how much the IRS is owed is to perform a business valuation of the gift. In these cases, the IRS may legally require a business valuation.

Other Purposes
Although business sales, divorce litigation and gift taxation are the most common purposes of business valuations, a business owner could have his or her business valued for a number of other reasons. Business owners who intend to sell their business at some point in the future may find it useful to have their business valued regularly to ensure the business continued profitability. Likewise, if a business owner chooses to gift ownership shares to family members or draft buy-sell agreements to accompany life insurance in the event of the owners death, business valuations will be necessary.

Maggie Segundas is a freelance SEO copywriter specializing in business accounting services such as forensic accounting, litigation support and business valuation services.

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