Benefits of Valuating a Business

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Benefits of Valuating a Business

CFO Tech Outlook | Tuesday, April 06, 2021

Potential business owners are usually experienced financial professionals who purchase companies as a daily part of their work line. To maintain a fair playing field, the business owner must be prepared with all the applicable considerations that affect the valuation of the business.

FREMONT, CA: Private holdings are typically the single largest asset of the owner of the business; the 80/20 rule applies, 80 percent of the capital of the owner of the business remains in the value of the business. Many company owners will commit substantial funds (which could well be spent) to control 20 percent of their marketable securities resources. At the same time, company owners also devote little resources to fully knowing the enterprise’s importance.

The example mentioned above is perplexing, provided that the problems involved in the private sector are more complicated, that the ownership stake in the private business is riskier and that it is infinitely more difficult to turn to cash than the marketable securities portfolio. Despite these financial facts, there are many benefits of valuation. Devoting resources to a thorough appreciation of a company’s importance is a smart use of funds.

To Be in a Place of Strength When Negotiating a Sale

 

Sales of a business is also the single most significant financial transaction in the business owner’s life. Potential business owners are usually experienced financial professionals who purchase companies as a daily part of their work line. To maintain a fair playing field, the business owner must be prepared with all the applicable considerations that affect the valuation of the business.

Handle Tax Transfers Efficiently

Well-documented business valuation is also an essential aspect of successful tax planning plans for private companies. For example, income tax characterization benefits for key executives as capital gains rather than ordinary income may be enabled by tax preparation mechanisms that depend on sound valuations. The appraisal of corporate interests on a minority interest basis is a widely used strategy that offers diminished estate and gift taxes when minority interests are sold or passed to family members.

To Be Equipped to Question a Potential Buyer’s Valuation

The company owner could be given a high value for the business to grant an exclusive time during due diligence, thereby limiting the opportunity of the owner to bargain with other buyers. In another example, an unreasonably high price could be given to the company owner, considering that the sale is to be financed solely by the purchaser’s finances, leaving the owner of the business with practically all liability and little leverage over the business. Situations such as this demonstrate that the company owner must be well prepared with all the details about the business’s worth needed to discuss a favorable price and conditions with a potential buyer.

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