Closely held business valuations are a complex process. You must understand the nature of business and determine which valuation method is most appropriate. Clients that own an interest in a closely held business will have several different reasons for needing business valuations.   

  • Succession Planning, Estate & Gift Tax Valuations 
  • Charitable Contributions  
  • Potential Sale  
  • Trust Compliance (Regulation 9, Distribution)  
  • IRA Compliance (Form 5498, Conversion, Failed Asset)  
  • Personal Financial Planning  
  • Other Valuation Situations  

There are three approaches that have been developed for conducting business valuations – the market approach, the income approach, and the cost approach. The valuation method to be used depends heavily on what type of business they own.  

The Market Approach

The Market Approach is based upon the valuation principal of substitution. The approach develops value measures based upon prices for comparable interests. There are two techniques typically employed in the market approach: the guideline publicly traded company method and the guideline merged and acquired company method. The guideline companies’ method of the market approach utilizes financial and market information regarding publicly traded securities of companies engaged in business pursuits similar to those of the Company. The market approach merged and acquired (transaction) method utilizes market transaction information regarding privately held companies engaged in business pursuits similar to those of the Company. 

The Income Approach

The Income Approach typically employs two techniques – a discounted cash flow technique and a capitalized earnings technique. A discounted net cash flow analysis provides an indication of value based upon the present value of anticipated future cash flows, discounted at an appropriate present value factor reflecting the risk inherent in the investment. The capitalized earnings technique applies a capitalization rate to a single period economic measure to convert that measure to a value indication. 

The Cost Approach

With the Cost Approach, the underlying assets of the company are considered individually, and the sum of these assets minus the stated liabilities results in an indication of the fair market value of stockholders’ equity.

When valuing a business, it is important to work with a qualified appraiser. Apart from our expanded services for Trust Owned Life Insurance, ITM offers a set of business valuation solutions to address the significant compliance and reporting challenges professional trustees face today with valuing closely held business interests.  Our team of qualified appraisers derive an unbiased opinion of value intended to help fulfill your fiduciary obligations.  For more information, please reach out to Greg Kizer.