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• There may be no business document as maligned or misunderstood as the corporate valuation , also known as a business appraisal. Although they're especially useful for business owners contemplating the sale of their companies, valuations are seldom commissioned by sellers at all - since most are convinced that nobody knows their companies' value better than they do. And while valuations can also have an enormous impact on strategic planning, they're typically overlooked there, too. • The thing to keep in mind is that when you own a private company, no one can look up its value in a newspaper. So when circumstances require that kind of information about a private company, its owner must hire someone to perform a study of its value that is logical and defensible. • The IRS will always start out from the premise that your company is worth the highest possible number. Unless you've got a good defensible valuation to back up your claim of a lower value, you can face real difficulties. • Don't expect the IRS to accept a defense based only on the so-called valuation rules of thumb, the industry guidelines that sometimes appear in textbooks or industry newsletters. • Rules of thumb are nothing more than the roughest of starting points. At best, rules of thumb can only help you approximate typical market prices for typical businesses in your industry. • Like Uncle Sam, bankers and investors are generally skeptical about rules of thumb . You can expect both groups to require a valuation - usually to be performed by appraisers of their choice - whenever a company seeks either a significant increase in credit or a new infusion of equity capital. A banker is likely to waive the valuation requirement only when a company's loan is fully collateralized by personal or corporate assets. |
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