Valuations for family owned and closely held businesses are confusing because of the varied reasons and uses and the potential for litigation in some cases. The eight ways that Mr. Mendlowitz will discuss are fair market value for tax based transactions including gifts, estates and employee compensation; valuing a business for a divorce; selling the business; buying a business as an Investment; buying the business to work in it; buying for a strategic reason; valuations in an owners’ agreement; and valuation for a personal financial plan. Each has a different set of rules and methods and the valuations can vary greatly. Mr. Mendlowitz will illustrate and explain eight different values for the same sample business.

It is important to understand the differences and why each method is important for its purpose. In some valuations, even the date of the valuation is an issue. For example, the proper valuation date in a divorce could be the date the parties separated, date the complaint was filed or a later date depending on the individual circumstances. This is further complicated if the gap between the earliest and latest dates is a couple of years.

The identity of the ultimate recipient of the valuation is also an issue. If the person selling a business requests the valuation, will it be provided to the potential buyer, or used as a strategy guide in setting the starting and bottom prices? Likewise if the buyer requests the valuation will he be provided with all the information needed to form an opinion including negative data. That is where the investigative skills and experience of the appraiser comes in.

In formulating an owners’ buy-out agreement it is necessary to determine a value where either party could be the buyer or seller. There, a balance of the interests needs to be considered and the valuation might not be the value used if there were a sale or divorce, but it is the “right” value between the parties for the purposes of the agreement.

Speech handout: http://www.withum.com/pdf/Partners_Network/Eight_Ways_to_Value_CloselyHeld_Business_april2012.pdf

You Tube animated video:  http://www.youtube.com/watch?v=-QTfv9bjDcY


Buy-Sell Agreements, Estate Taxation and Bequests, Gift Transfers, Transfers to Successors, Key-Person Phantom Stock Plan Measurement, Restricted Stock Plans, ESOPs, Compensation Plan Purposes, Value to Owner in Their Financial Plan, Move Owner to Macro Thinking About Their Business, Show Owner How to Recognize Strategic or Hidden Value in Their Business, Identify Strategic Acquisitions, Understand How Marketplace Will Recognize Value of a Business, Help Determine Position of Business’ Life Cycle, Credit Purposes, Financial Statement Uses, Allocation of Purchase Price in a Sale or Acquisition, Measure Growth in Value of Business, Deciding Whether to Sell or Liquidate, and Divorce and Marital Separations.  


The true market value of a business is only determinable when it is sold – and even then it is only for that time with that buyer. However there are methods of valuing a privately owned business that can provide a valuable insight and measure to the owner.

A business is a valuable asset of the owners – it provides their living, independence, a degree of security and if properly handled a payout when the owners are ready to retire.

Running a business on a daily basis forces the owners to make dozens of decisions, many times without benefit of much advance thought and consideration, and it becomes easy to sometimes lose perspective. Having the business objectively valued provides a completely different perspective of how others would look at the business and the size and scope of the asset that has been created and that is being managed. And that is, I believe, the best reason to have the business valued when there are no thoughts of selling, or no other reason.

The process of having the business valued provides benefits far greater than the nominal cost. It creates a bigger playing field for the owner to use to assess the results of their decisions; it shows how value can be created and triggered and can give a direction toward that; it can show how an initial cost that might not want to be incurred because of a nebulous payback can be recouped by creating a much greater value to the company; it places the business owner in a position to measure the business in terms of value creation and not on the immediate profit from a transaction or direction; it shows value drivers; it can uncover areas of the business that can be exploited for greater current profit as well as long term growth; and it helps create a vaster vision for the business.

The appraisal also places the business’ value in perspective with the reality of how the business would be perceived by potential buyers – and this is sometimes an eye opening and humbling, experience.

And finally, knowing how value is created, and tracking it, can help the owner better run the business.


Fair market value is widely used to describe the value of a business. However, there are other ways a business can be valued that could be more appropriate based on the circumstances. Following is a checklist guide.

 Fair market value: This is used to value a business for tax reasons, particularly for gifts and estates. Its definition is found in a 1959 IRS Revenue Ruling and has been adopted as the standard for business valuations for many purposes. Consideration is also given to discounts from the proportionate value for non control and minority interests. Limitations exist when a current value is needed in a divorce or dispute; when a business is actually being purchased or sold; or where there are special attributes that are not reflected in the earnings history such as a patent or new procedure that is just taking shape.

 Fair value: This is a legal concept employed in shareholder dissent and oppression matters to primarily protect minority owners from abusive and confiscatory actions by the majority owners. Discounts for minority interests are usually not applied due to the statutory nature and purpose of this valuation.

 Fair value for financial reporting: This is the newest method and is used when valuing assets reported on a balance sheet. This method has been “legislated” by the people who determine generally accepted accounting standards. Emphasis is placed on current realizable market values of assets included in the balance sheets and intangible such as acquired goodwill and its potential realization at the time of valuation. In the latter part of 2008 when liquidity dried up and there was no apparent ready market for much of those assets the write downs greatly accelerated the downfall of many of the large banks and brokerage firms holding such assets.

 Pricing a Business for a Sale: These valuations help clients identify value drivers and value the business in a realistic manner to be offered for sale.

 Assessing value for insurance controversies: Businesses need to be valued where there is a fire, flood, oil spill or other disaster that causes destruction.  

 Valuation for a partners', members' or shareholders' [buy-sell] agreement:  Different considerations go into valuing a business for a buy-sell agreement. And one agreement can have different valuations depending upon the reason for a partner leaving - voluntary, retirement, disability and death can all have different criteria.  Also personal bankruptcy or losing a professional license can have other valuations. Further, when there is a death, the valuation has to pass IRS scrutiny.  And today's valuation issues might not be applicable many years down the road. At all times the parties need to keep in mind that they could be on either side of the future transaction. We will help you unravel the various issues and provide you with the appropriate valuation and benchmark for future valuations.

 Valuation for transfer to a successor: This is a unique situation where the valuation needs to withstand possible IRS challenges while recognizing the ability or lack of ability of the successor to bring new money to the transaction.  This usually done in connection with sound and comprehensive succession planning.

 Valuation for phantom stock and other compensation based purposes: Many issues to consider here including the payment of taxes and its timing and IRS special provisions for such agreements.  There are mirror image issues that need to be addressed because while the employee coudl have taxable income the employer has a corresponding deduction.

 Standards in a divorce: There are varying methods used in state courts for matrimonial issues that extend from what a business might be worth in an immediate sale to what it cost to create or to recreate to what it is worth to the present owner – concepts not used in the fair market value method.

 Investment value: This refers to the value of the business considering the owner’s expectation of risk, return and potential. On some basis most businesses are acquired with this in mind, but not all valuations, as we can see in this checklist have that as criteria.

 Strategic value: Included are synergies and special features added by the owner, and not the distance of the “hypothetical” owner of the fair market value method. An example might be the location of a business, or products that expand a product line or add a type of customer to the company.

 Market value of traded securities: Easy. Look at the current stock quote. However, for those with very large blocks there usually is a private sale at a discount from the quoted prices. Also, thinly floated public shares can cause great accelerations, up and down, when there is substantial buying or selling.

 Book value: This refers to the value reflected on the company’s books based on original cost with downward adjustments applied based on accounting and tax rules. Book value is rarely used when there are assets other than financial assets.

 Liquidation value: This is used when it would result in a greater value than the other methods. However, there are differences in its application. The value of a business in a forced hurried liquidation would be substantially less than if it were exposed to the market with the liquidation occurring in an orderly fashion over a reasonable period of time.

 Ego value: Many people invest in professional ball teams, restaurants and similar activities so they could be a “player” and not for the return on investment. These values usually have no bearing in comparison with the other methods.

Keep in mind that a valuation is the present value of future expected cash flow from that investment; that what is expected by one person is not necessarily what would be expected by another; and the method used should be chosen to yield the appropriate result given all the circumstances.


Article: http://www.nysscpa.org/cpajournal/2003/0203/dept/d024803a.htm


For more information, and to find out how we can value your business for gift and estate tax purposes, for employee compensation plans, business owner "divorces," and marital separations, call Ed Mendlowitz at 732 964-9329.