Business Valuation 101

Business Valuation Overview

• Business valuation is the process of determining the economic value of a business or company.

When Business Valuation is Typically Conducted

• Business valuation is typically conducted when a company is considering a merger or acquisition, or when it needs to report its value for tax purposes.
• It may also be conducted when a business is undergoing a buy-sell agreement, or when its ownership structure is changing.

Factors Analyzed During Business Valuation

• Financial performance, such as revenue and profit growth
• Market position and competitive landscape
• Management team and organizational structure
• Assets, such as property, equipment, and intellectual property
• Liabilities and debt obligations

Approaches to Business Valuation

• Income approach, which estimates a company's value based on its expected future cash flows
• Asset-based approach, which values a company based on the value of its assets
• Market approach, which estimates a company's value based on the market value of similar companies

Importance of Valuation for Tax Reporting

• Valuation is important for tax reporting because it determines the tax liabilities of the company and its owners.
• Accurate valuation can help minimize tax liabilities and avoid disputes with tax authorities.

Purposes of Business Valuation

• Determining the value of a company for a merger or acquisition
• Reporting the value of a company for tax purposes
• Establishing the value of a company for a buy-sell agreement
• Obtaining a loan or financing
• NOT for making investment decisions

When Business Valuation is Required by the IRS

• When a company is undergoing a merger or acquisition
• When a company is reporting a significant change in ownership or capital structure
• When a company is claiming a tax deduction or credit related to the value of its assets

Business Valuation in Mergers and Acquisitions

• Determines the value of the target company to the acquirer
• Helps negotiate the purchase price and terms of the deal

Business Appraisal and Loan Obtaining

• A business appraisal may be needed before obtaining a loan to secure the loan with the company's assets

Purpose of Purchase Price Allocation

• To allocate the purchase price of a company to its individual assets and liabilities for financial reporting and tax purposes.