For many business owners, their closely held business is their most valuable asset. Whether you are thinking about estate planning, succession, gifting, or a future sale, understanding the true value of your business is critical. A well-supported business valuation provides clarity, supports strategic planning, and helps reduce tax risk and disputes.
Below, we break down what a business valuation is, why it matters, and when business owners and estate planning clients should consider obtaining one.
What Is a Business Valuation?
A business valuation is the act or process of determining the value of a business enterprise or ownership interest. One of the most common standards of value, fair market value, is generally defined as:
The price at which property would change hands between a willing buyer and a willing seller, when neither is under compulsion to buy or sell and both have reasonable knowledge of relevant facts.
The following U.S. professional organizations provide accreditation in business valuation:
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American Institute of Certified Public Accountants (AICPA)
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American Society of Appraisers (ASA)
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National Association of Certified Valuators and Analysts (NACVA)
Who Typically Needs a Business Valuation
Business valuations play a foundational role in many planning and decision-making scenarios. Here are some of the more common reasons for obtaining a business valuation:
- Mergers & acquisitions
- Estate, gift, and income tax
- Litigation and ownership disputes
- Marital dissolution
- Shareholder oppression cases
- Buy-sell agreements
- Recapitalizations
- Stock option plans
- Compensation
- Business planning
- Family limited partnerships
- Financial reporting
From a strategic perspective, valuations can be a key component to understanding what is driving (or eroding) business value. They can also help a business owner to identify strengths and weaknesses in current operations and in assessing whether current business strategies are aligned with long-term goals.
What Is Being Valued?
Not all ownership interests are created equal. A valuation considers the specific interest being valued, including:
- Degree of control and voting rights (controlling vs. non-controlling interests)
- Marketability and transfer restrictions
- Governing documents and applicable state law
Real estate considerations: do you have real estate held inside your operating entity or is it held in a separate holding company?
When real estate is involved, questions such as fair market rents, related-party leases, and the existence of written agreements can significantly affect value.
Estate Planning and Valuation
Estate planning clients often require valuations at key points, including:
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Initial estate plan creation or material revisions
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Lifetime gifts or sales to family members or trusts
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Succession planning or ownership restructuring
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Death of an owner or trust funding events
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Supporting basis step-up planning
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Preparation of IRS Forms 709 and 706
A qualified appraisal is required for estate, gift, and charitable gift tax filings and is often critical to supporting valuation discounts for lack of control or marketability.
Buy-Sell Agreements and Valuation
Well-designed buy-sell agreements should align pricing mechanisms with fair market value. Regular valuations can:
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Reduce conflicts among owners and heirs
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Improve transparency around company value
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Support consistent treatment for incoming and exiting owners
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Avoid estate-tax-driven valuation inconsistencies
Key considerations include: whether discounts (discounts for lack of control and discounts for lack of marketability) are allowed, how triggering events are handled (retirement, death, divorce), and whether transferability is restricted.
How Business Valuations Work (High Level)
While every valuation is unique, the process generally includes:
- Understanding the company, industry, and ownership interest
- Analyzing and normalizing historical financial statements
- Assessing company-specific and external risks
- Interviewing management to understand operations and future expectations
- Evaluating balance sheet assets and liabilities at fair market value
- Reviewing comparable company transactions
Common valuation approaches include:
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Income Approach – Present value of expected future cash flows
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Market Approach – Pricing based on comparable companies or transactions
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Asset Approach – Net asset value, often used for asset-intensive entities
Approach selection depends on the facts and circumstances, though for operating companies, cash flows are often the primary driver of value.
Why Rule-of-Thumb Methods Fall Short
Rules of thumb may be useful as a high-level sanity check, but they:
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Do not comply with professional valuation standards
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Ignore entity-specific risks and ownership rights
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Rarely withstand IRS or court scrutiny
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Oversimplify the factors that truly drive value
For meaningful planning decisions, a formal valuation or limited-scope calculation performed by an accredited professional is essential.
Common Planning Mistakes to Avoid
Some of the most frequent valuation-related mistakes include:
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Using informal or outdated valuations
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Inconsistent values across planning documents
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Outdated or missing operating and buy-sell agreements
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Failure to update valuations after material business changes
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Lack of coordination among legal, accounting, and valuation advisors
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Poor timing around gifting or transfer events
Key Takeaways
Business valuations play a critical role in effective estate and succession planning, and owners considering a sale should start preparing well in advance, ideally 5–7 years ahead. Understanding the key value drivers and industry benchmarks can help enhance a company’s worth, while removing excess working capital and discretionary expenses can further improve value. Regularly reviewing governing documents ensures planning stays aligned with goals, and close collaboration among attorneys, CPAs, and valuation professionals leads to stronger, more reliable outcomes.
If you have questions about business valuations or how they fit into your broader planning strategy, our Business Valuation team is here to help. Contact your Perkins advisor today!