Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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Business valuation specialists come in many forms, and for a business owner it can be very difficult understanding the various business valuation expert designations. More importantly, when the business owner is in need of a valuation, understanding exactly what type of expertise or special designations may be necessary and ultimately who to hire can become a daunting task.
Let’s break the challenge down into two parts:
First, we will address the purpose for the business valuation. Then we will address the various types of business valuation specialists available to business owners.
Various Business Valuation Purposes:
Business Valuation Litigation
Business valuations are sometimes needed for court proceedings such as lawsuits, ownership or shareholder disputes, and business disolutions. For example, if an incident takes place and a business is sued, a business valuation can help determine how much the defendant owes the plaintiff.
Business Buyout Valuation
If an investor or co-shareholder wants to buy a portion of a business or a whole business, a business buyout valuation must take place. This establishes how much the investor or co-shareholder will pay the business owner.
Cross Purchase Buy Sell Valuation
Cross purchase agreements are used for business continuity planning purposes. In a cross purchase buy sell agreement, a business owner’s surviving partners will buy his interest in the company from his family if he dies. This type of valuation will determine how much the surviving owners pay to the deceased owner’s family.
Divorce Business Valuation
These business valuations will have an impact on the amount of money or interest in the company each party receives in the divorce settlement. When a couple gets divorced, all of their combined assets are typically valued. Assets may be divided according to each person’s circumstance if the state follows equitable distribution laws. If the state supports community property laws, the couple’s joint assets will be divided exactly in half.
Business Valuation for Gift Tax Purposes
If a business owner or shareholder wants to gift his common stock or equity to a family member or another person, the IRS requires reporting of the gift’s value.
This involves two steps: the valuation of the business itself, and determining the valuation discounts, if applicable. A discount for lack of marketability or lack of control in the business may reduce the value of the gift although the IRS imposes penalties on valuations that have been understated deliberately.
Accordingly, it’s important to be able to fully substantiate the valuation with discount when gifting business equity to another person.
Estate Tax Business Valuation
The estate tax applies to assets and property transferred to family members when a person dies. As with gift tax valuations, business valuations for estate tax purposes may be eligible for certain discounts. The estate tax only applies to estates exceeding a certain value; for 2014, the value is $5,340,000.
Selling a Business Valuation
When selling a business, the business owner should have a professional business valuation done. This will avoid an asking price that is much too high and that turns off potential buyers, and also protects against a price that is too low and undervalues the business.
Various Business Valuation Experts:
Certified Valuation Analyst – CVA
Certified Valuations Analysts have studied business valuation and passed a test administered by the National Association of Certified Valuators and Analysts. CVAs may be CPAs or hold other business degrees with substantial experience in business valuation. (In April 2013, the Accredited Valuation Analyst – AVA credential was merged into the CVA credential.)
Certified Business Appraiser – CBA
Certified Business Appraisers are business professionals who have completed Business Valuation and Certification Training, passed an exam, and submitted two demonstration reports for peer review. The Institute of Business Appraisers manages CBA training and certification.
Recently, the CBA designation has become part of the NACVA organization.
Accredited in Business Valuation – ABV
The Accredited in Business Valuation credential is granted by the American Institute of CPAs. CPAs must pass the ABV exam, complete either 6 business valuations or 150 hours of valuation experience, and must complete 75 hours of valuation-related continuing professional education.
Accredited Senior Appraiser – ASA
Accredited Senior Appraisers in business valuation must have at least five years of full time appraisal experience and must pass four Principles of Valuation courses. This credential is granted by the American Society of Appraisers.
Certified Public Accountant – CPA
The Certified Public Accountant license is granted by each state. CPAs must meet their state’s education and experience requirements and pass the Uniform CPA Examination. Not all CPAs have experience in business valuation work, so it’s prudent to ask about their specific training, continuing education classes and actual business valuation engagements and not assume the CPA is the appropriate professional advisor.
Business owners should look for these credentials and certifications to ensure their business valuations are done correctly. To find the right business valuation expert, business owners should also search for experts who have experience in the specific type of valuation they need.
When You Simply Want to Know What Is My Business Worth Is a Business Valuation Expert Needed?
There are times when a simple valuation is what a business owner needs. He may be assessing how much life insurance he should purchase to cover a cross-purchase agreement with co-owners. Or maybe it’s just his curiosity getting the better of him.
Knowing the value of a business, based on how the company has financially performed over the past couple of years in relation to its competitors, would be worthwhile to most business owners. Do they want to hire a business valuation expert to satisfy their curiosity? Not likely. That’s when using an online business valuation service makes good sense.
