Business Valuation

The Importance of Business Valuations

Now that you have a closely-held corporation, all the work and brainstorming with your accountant, attorney, financial analyst, marketing consultant, and IT webmaster has paid off. Never did you suspect the business would shift into high gear so quickly.

You're about to take a rest and enjoy what you've accomplished over the last three years, when you suddenly realize the Buy and Sale Agreement you put into effect has a problem, a major problem. Yes, you have covered death and disability, but how you valued the company has become a problem.

You and your two partner/shareholders had invested a tidy sum of money for furniture and fixtures, computers, and machinery, and all you and your partners expected when you left the company was a return of your initial investment. But things have changed. The company is no longer small. In the last several years, the company purchased real property, hired more employees, and of course, the profits increased.

Thoughts ruminate in your mind that the company is worth more than the initial investment. Immediately, you're driven to business valuation. That's it, I think we should have the business valued.

Then you learn that business valuation is not as simple as adding up the tangible assets: there's goodwill, customer list, the patent, the experience and know how, the workforce, and ...

Well, you realize the buy and sell agreement does not take into consideration the fair market value of the shares of stock.

Business valuation is more than adding goodwill to the tangible value of assets as most agreements may address. The intangible assets may exceed the value of the tangible value of assets. Should the agreement be totally revamped to avoid the dreaded battle of appraisers?

At this point you understand that the simple business that dictated a simple business agreement no longer fits.

The business valuation, key to the receipt of fair market value, opens other avenues that you need to explore. For example, if a shareholder/partner is disabled, does that automatically trigger a sale of stock or a partner's share? Does the business have sufficient funds to pay out the shareholder/partner? Do you need life insurance? What about key man insurance? What if I want to gift my shares to my children? Should we have a non-compete agreement?

As a result of your self-analysis, you now decide that no longer should the three shareholder/partners meet over lunch to discuss the business. Formal meetings are required and one of the items at the top of the list should be the Buy and Sale Agreement, which should be reviewed annually, and what exactly is the fair market value of the business?

In the end, you convince your shareholder/partners to obtain a business valuation before you run into problems down the road.

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If you would like more information about Pennsylvania Elder Law, Business Law or Tax Law, please contact an experienced Pennsylvania Attorney who is also a Certified Public Accountant (CPA) via email or phone us at (724) 216.6551 at our Greensburg, Pennsylvania office.

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