When considering situations that require a business valuation, the most common scenarios typically involve some kind of transfer of part or all of a business. However, there are times when a valuation may be needed or can be beneficial, even if there is no transfer occurring. These are usually driven by personal financial planning, such as the retirement of a shareholder or business owner and then trying to determine the best timeline for doing so. Below are three common scenarios that may require a valuation outside of a business ownership transfer.
Buying or selling shares
Some companies that encourage employee ownership may allow employees to buy and sell shares annually and, as a result, should have a yearly business valuation performed to determine the value of those shares. The company can then set the current price per share and determine how many shares will be available for purchase based on how many shares employees are looking to sell. Alternatively, an employee planning to retire soon can plan a phased approach to selling their shares rather than wait until their last day of employment (or when required by the company). Employee ownership can also include ESOPs, where a valuation is required at least annually.
A valuation can be a helpful tool for businesses with a number of shareholders or family members who own a part of the business but are not involved in the day-to-day. Since these individuals are not heavily involved in the business, they are likely not aware of what their share of ownership is worth and how their investment is performing. It’s helpful to have an idea of the value of their ownership interest, as it plays into one’s larger financial planning. These types of valuations do not require a report that would need to be in compliance with any third party like the IRS, so they may come at a lower cost. If a valuation for gifting or estate purposes is required, some of the previous valuation work can then be leveraged in the future.
In the case of a potential prenuptial agreement, a business valuation can also be used to help determine the value of one’s ownership in the business if one party is an heir to all or part of a business. Without a prenuptial agreement, business ownership can become a marital asset. For instance, if a divorce occurs in the future, the value of one’s business ownership interest will need to be determined to value the ownership for equitable distribution purposes. Complicating matters further, if ownership in the business occurred before the date of marriage, the ownership is not considered marital property. Still, under Pennsylvania law, half of the appreciation in the value of the ownership interest would then be subject to equitable distribution. A valuation performed before or close to the date of marriage provides a historical record of that value.
Regardless of the reason, considering a business valuation outside of an anticipated transfer or transaction can be beneficial, and RKL’s valuation team is here to help. Reach out to your RKL advisor or connect with us using the form at the bottom of this page.