How to Estimate the Value of Your Business

How to Estimate the Value of Your Business

How to Estimate the Value of Your Business

The problem of stock valuation in a closed corporation canbe a heartbreaker. When a firm sells its shares on the open market, there is no problem in determining the value of thestock at any given time. But in a closed or family corporation,there can be as many approaches to valuation as there arepeople with a self-interest. The Internal Revenue Service maywant one valuation, based on arriving at a maximum estatetax; your wife may want a different valuation; your fellowstockholders may have still different ideas, particularly if they are obligated to buy up your shares.

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It is not enough to content yourself with a buy-and-sell orstock redemption agreement. It is not even enough to have lifeinsurance in force to fund the agreement You must be surethat the agreement contains a formula or procedure for valuation, and if it calls for yearly revaluations, make sure that thisis done. This is the only way you can build up a realisticvaluation record. Too often, a buy-and-sell or stock redemption agreement is signed, and the stock endorsed, and the lotis tucked away somewhere, not to be opened until the deathof one of the parties. It is not only awkward but tragic to findin such a contingency that the instrument that was executedten or fifteen years previously is about as realistic as Alice inWonderland.

There are several methods by which a valuation may be made. But, so long as the following conditions are met, thevalue of the business interest as set out in the agreement or asdetermined in accordance with a formula set out in the agree ment, will be decisive for estate tax purposes.

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