Calculation of Value: Why it’s important for your Business

Jul 9, 2020Business, Business Valuation

Are you aware of your company’s value?

COVID-19 has been a trying time for businesses and may be the right time to take advantage of business transition opportunities. With the current economic situation, gifting programs should be evaluated because of lower company values. Smith Schafer can assist with this evaluation by performing a business valuation. There are three options for business valuations:

  • Detailed Valuation Report
  • Summary Valuation Report
  • Calculation of Value

All three of these options are a bit different in content and investment, and each will provide a value or range of values. 

Depending on the company’s needs, something less lengthy and comprehensive may be the perfect option. A calculation of value is less in scope, investment of time, and cost.

What is a Calculation of Value?

A calculation of value report provides an approximate fair market value of a business using data from comparable business, the earnings capacity and cash flow of a company, and valuation professional judgment. The application of a valuation approach will calculate a value or range of values of an entity. The calculation of value may be a written or oral report. It is an ESTIMATE of the value of a company. 

Pros of a Calculation of Value

  • Cost-effective.
  • Helpful for tax compliance as it relates to estate and gift tax if a preliminary value is needed for planning purposes.
  • Provide the business owner or their advisors with the estimated value of the business.
  • The value is a range or a single number.

Cons of a Calculation of Value

  • Only one or two valuation methods used to compile.
  • Will not include all the procedures of the other reports.
  • The report is not as detailed as the other reports.
  • Restrictions on the intended users of the report.

Most business owners are reactive when it comes to having their businesses valued. But there are many times it pays to be proactive. For example, in today’s economy the value of a company may be less than it was, which may allow for gifting of more shares under the annual gift tax exclusion. On a lifetime basis in 2020, an individual would be able to gift more within their $11.58M lifetime gift tax exclusion. And if they have a spouse, this amount is $23.16M. This increased CURRENT gifting could save substantial money in the future.

It is crucial to have a business valued by a credentialed valuation professional. Smith Schafer works with business owners, in multiple industries, to uncover the true value of their companies’ tangible and intangible assets.

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