Why is a Business Appraisal Necessary for Small Businesses?

October 1, 2021


The process of valuation or appraisal of a business seems like a tedious task. However, in most cases, it may be beneficial or essential. There are many ways to conduct a business appraisal to evaluate the worth of your firm, allowing you to decide the optimum asking price for buying or selling. 

And anyway, you wouldn’t want to price excessively high and turn off buyers, but you don’t want to sell excessively low and not get paid what your business is worth. 

Let’s delve a little further to see why estimated valuations and company assessments are essential, as well as how to get one done.

Here are some solid reasons why you might require a company appraisal:

1. Giving Interests to someone

You can contribute up to an exemption amount ($14,000 in 2014) to every other individual you want without paying the federal gift tax. 

Contributions exceeding this threshold are taxable or diminish the amount that can be transferred tax-free upon death. But how would you determine if a gift of stock in a business or assets in an unincorporated firm (e.g., an LLC) falls under this monetary limit? 

An appraisal performed at or before the transfers will evaluate the value of the gifts and will assist you in appealing against any IRS valuation issue.

2. Co-Ownership with Investors

What must investors offer for a stake in your small business? It all depends on how much the firm is worth. A small business appraisal is required to ascertain pricing for a buyer to purchase into your firm.

While some prominent indicators (e.g., a multiple of profits) can determine value. An assessment is necessary (e.g. if you are pulling in investors who are purchasing a significant stake in the property).

3. Making an ESOP

You will require an Employee Stock Ownership Plan if you wish to start sharing the proprietorship of your business (either C or S) with your employees (ESOP). As per the National Center for Employee Ownership, ESOPs presently includes 13.5 million employees at 7,000 firms.

Although publicly listed firms use their market value for the ESOP, privately owned enterprises require an appraisal to determine whether they can claim the donation to the scheme and how much employees can receive yearly.

4. Make donations to charities.

You might wish to donate to a local charity by citing your company as the source of the contribution. This does not need you to be a public business. When the deductible exceeds $5,000, a business appraisal is required. Some years ago, one of the shareholders of Jackson Hewitt, the tax filing business, ignored this regulation and wasted his deduction for a charitable contribution of some of the company’s shares. 

5. Separation or Divorce

Your company’s stake might be a significant element of a settlement agreement following a divorce. 

Your partner may well be entitled to half of what you own if you reside in a community property state.

If you live in a state that does not recognize marital assets, the division is subject to equitable division, determined by how much the item is worth and what the partners can settle on or the court decrees.

6. Litigation

If your company is prosecuted and loses, the policy may not cover the monetary award. 

Getting a company assessment might assist you in making decisions such as selling stock to pay off debts or shutting the firm entirely.

7. Buying and Selling a Company

How much should the market price be? That is determined by the value of your company when it is made open for the public. At the absolute least, an appraisal may assist you in making intelligent decisions about when to trade and how much to quote as a sale price. 

8. Planning an Estate

The value of your firm determines whether you need to conduct property tax preparation. 

If the valuation of your business plus the valuation of other possessions exceed the federal estate tax exemption limit ($5.34 million in 2014), hire qualified accounting services in San Diego. They will help you devise a strategy that reduces your property’s tax liability while maximizing the amount successors can retain after-tax. Although if the property is not substantial enough to trigger federal estate tax issues, state rules could be an issue. 

The reimbursement amount in New Jersey, for example, is $675,000. Estates worth more than this amount may be taxed. Therefore, precise tax preparation is required.

9. Post-Mortem Preparation

If you co-own a company and have planned ahead of time, you will have a buy-sell contract in place. 

This agreement specifies who will inherit your interests upon your death and their compensation for it. 

A buy-sell contract includes a method for determining the business valuation of the firm and your stake in it.

Many times, buy-sell contracts require a business appraisal at the time of demise to calculate this valuation. 

 10. You will need it anyway!

 An owner may require a company evaluation to assist them in determining the future course of action. While the expenditure in an appraisal is significant, an owner at a crossroads may want the knowledge to determine whether to sell, extend, liquidate, or move in a particular approach. 

It might be an activity that leads to better success and progress.

 If you need a business appraisal in San Diego for whatever reasons, choose a qualified accountant that specializes in business appraisals.

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