M—Business Valuation

There are many reasons why the owner of a closely held business must have some idea of the value of his business:

• Whenobtaining loansa higher, yet realistic, value could result in increased credit.
• If thereasonableness of compensationto an employee-stockholder is challenged by the IRS, knowing the value of the business will be helpful.
• Indetermining a pricefor the business when it is sold upon death, disability, or retirement.
• Forestate planningpurposes, the higher the value, the greater the potential estate tax.

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Valuation is an art; it is not a science. With the closely held business, the concept of valuation is often elusive. Pat answers rarely exist. However, with many businesses, “capitalizing” expected earnings can be a useful starting point for determining fair market value.