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Business valuations are often equated with selling a company, but in practice, transactions represent only a fraction of the demand for these services. For estate planners, attorneys, and family business owners, the reality is far more nuanced.
Business valuations support a wide range of strategic needs beyond a business purchase or sale and understanding these scenarios can greatly benefit both advisors and their clients. Whether for tax planning, litigation, or internal decision-making, a well-supported business valuation is a vital tool in navigating complex business scenarios.
So, in what situations might a business valuation be appropriate? The following examples highlight just a few scenarios where a person(s) might seek a business valuation.
1. Estate and Gift Tax Planning
Family business owners often transfer wealth to the next generation during their lifetime or through their estate. The IRS requires that these transfers reflect fair market value, making a credible business valuation critical for accurate reporting and minimizing audit risk. For estate planners, business valuations are the cornerstone of structuring gifts and bequests in a way that is equitable and tax efficient.
2. Succession and Continuity Planning
While tax efficiency is important, succession planning goes beyond tax compliance. It’s about ensuring the long-term survival of the business. A valuation provides a financial benchmark for buyouts, onboarding the next generation of leaders, or equalizing inheritances for family members who are not active in the company. Without this clarity, transitions can create uncertainty, conflict, and even jeopardize the legacy of the business.
3. Buy–Sell Agreements
Many closely held businesses have agreements among shareholders or partners to handle ownership changes due to retirement, disability, or death. These agreements only work as intended if the value of the business has been clearly defined and updated periodically. A business valuation ensures that all parties understand what “value” really means, avoiding tension when those triggering events occur.
4. Litigation and Shareholder Disputes
Disagreements among business partners or shareholders can escalate quickly, often requiring legal intervention. The valuation of the business in these situations may determine buyout terms, assess damages, or clarify ownership stakes. Because these disputes directly affect business continuity and stakeholder equity, courts and arbitrators often give greater weight to independent valuations supported by defensible methodologies.
5. Divorce Proceedings
When one or both spouses own a business, the valuation becomes central to dividing marital assets. Unlike shareholder disputes, the question here is not about internal governance but about personal equity. Courts rely on business valuation experts to establish the fair value of a spouse’s business interest, often requiring expert testimony. Jurisdictional rules, such as whether discounts for lack of control or marketability are permitted, make professional expertise and credibility critical in this setting.
6. Compliance and Financial Reporting
Certain accounting standards require valuations for compliance purposes, particularly when dealing with goodwill impairment, purchase price allocations, or stock-based compensation. These valuations are vital for auditors, board members, and regulators, ensuring transparency and consistency in financial statements.
The Bigger Picture
The reality is that business valuations touch nearly every stage of ownership, whether or not a sale is on the horizon. From navigating legal disputes to planning for continuity, valuations are tools for foresight as much as they are for compliance. For business owners and advisors, the real question isn’t if a valuation will be needed, but when. Being proactive ensures smoother transitions, fewer surprises, and stronger outcomes for everyone involved.
If you would like to learn more about our business valuation process or team, please visit our website for more information or you can call our office at (833) CPA-BMSS.