As you know, gifting is an important part of estate planning. But what many owners fail to realize is that an accurate valuation of their business is an essential first step—before the gifting begins. It is important for business owners to know exactly how much their business is worth, so that they can gift in the manner that is the most beneficial to their estate planning strategy.
As of this year, tax law provides for a $5 million gift exemption—much higher than previous years. However, in 2013 this exemption is slated to drop to $1 million. As a result, 2011 and 2012 represent golden opportunities to execute their gifting strategies. However, before taking these steps, it’s important to ensure that your assets are properly valued. And while many assets are relatively simple to evaluate, the reality is that the true value of a business could vary substantially from what you may expect. That’s why, in order to take advantage of the $5 million gift exemption, it’s important to pursue a professional business valuation first.
However, a business valuation is helpful for more than simply creating a gifting strategy. For instance, if selling your business is a part of your long-term retirement strategy, a business valuation will give you an accurate evaluation of your company from the perspective of a future buyer. In a business valuation, emotion and other intangibles are removed from the picture—providing you with the only the facts. Your valuation will identify areas of financial weakness, allowing you to make corrections and strengthen the position of your business into the future.
While the term “business valuation” may sound intimidating to business owners, the process is straightforward. Below are the three basic elements of the process.
- First, the standards for the valuation must be set. Will the business be valued as a “going concern,” meaning that it is expected to continue operating as it does today? This is typically the case, but if the business is to be closed down or restructured, it may be valued based on the current value of assets minus debt and other liability.
- The valuation will also include an analysis of the general economic conditions the business is operating in. Obviously, a business operating in a strong economy with a growing market will be worth more than a business facing a dying market or a weak economy.
- A business valuation features extensive financial analysis. Valuation experts compare financial statements and ratios across various time periods in order to gauge the growth or lack thereof over time. In addition, these financial ratios are compared to other businesses in the same industry, in order to establish a fair benchmark. The goal of a valuation is to establish fair value, so it is necessary to account for differences between industries and markets.
As you plan for the future of your estate, a business valuation is an essential first step. Act quickly so that you can take advantage of the significant gift exemptions that will be on the books through 2012. Contact me today to learn more!