Business Valuations are essential in a multitude of financial situations or opportunities. Businesses can be bought, sold, financed, sued, own real estate, pay taxes and do most things that a living human-being might do. As a result, the business may need to be “valued” for one of these purposes. Understanding a unique business and being able to ascertain a value range for a specific purpose becomes somewhat of an art.
Normally financial experts are involved, like CPA’s, insurance agents, bankers, brokers, and lawyers. Since “value” can be a subjective matter, the results are often disputed and sometimes this leads to litigation. Or, like in the case of a divorce proceeding, a business owned by one or both of the spouses must be valued as a result of pending litigation. Each party may be trying to maximize what they receive and minimize what they pay out in a transaction. So accurate business valuations may be hotly contested.
The Internal Revenue Service is interested in business valuations also, since each transaction must be accurately recorded and any tax liability ascertained and paid. Add to this that the IRS methods are often different from the real world, you will end up with business valuation variables. For example, assets which may be written off with accelerated depreciation or Section 179 expensing will have no remaining “tax valuation.” However, in the real world, those assets may be extremely valuable. Take for instance a truck purchased for $100,000 and full depreciated for tax purposes may still be used daily in a business. The resale value may be $45,000. Even though on the books it has no value, when the business is valued, the owner wants to receive fair value for that truck.
In matrimonial actions, valuation of businesses may become tricky. The spouse controlling or owning a business may want to hide some assets to avoid paying the other spouse their full share in the case of a buy-out. A Forensic Accountant may help to find hidden assets and reach a more “true” business valuation.
Whether a business is being valued for sale, purchase, or other reasons, a Forensic Accountant may run into situations of fraud, embezzlement, pilfering, and lack of accurate accounting, all things which must be considered for criminal and civil law actions. Sometimes the research and investigation by a Forensic Accountant or CPA may save a business from a pending collapse unknown to either the buyers, sellers, or spouses involved.
This is a brief introduction to Business Valuations. See ongoing articles for more on this subject.