Business valuation is the process of determining the worth of a business, and there are many reasons for making accurate business valuations. A business valuation can be helpful to a business when seeking credit and in determining reasonableness of compensation for employees (a subject often of interest to the IRS). Business valuations are also extremely important for the purpose of a buy-sell agreement for a closely held business.
Why Is Business Valuation Important?
Business valuation is the heart of the buy-sell agreement instituted between owners of a business. Buy-sell agreements provide that surviving owners will buy a deceased owner’s business interest at an agreed-upon price, and the deceased owner’s estate is obligated to sell at this price. Business valuation makes it possible to determine the value of the deceased owner’s business interest which in turn determines the amount surviving owners must pay to the insured’s estate.
Here is a brief review of the eight factors involved in the valuation of closely held corporate stock according to Rev. Rul. 59-60.
- The History and Nature of the Business
- National Economy and Specific Industry
- Financial Condition of the Business
- Earning Capacity of the Business
- Dividend-paying Capacity
- Previous Sales of Stock
- The Fair Market Value of Publicly Traded Stock of Comparable Businesses