Succession Planning 102

If you are going to exit your business some day you must answer a very fundamental question: What is my business worth? Sounds like a simple and straightforward question but the answer can vary tremendously. Valuation of a closely held business is more art than science.
The first to place to look for guidance (other than your CPA) is the IRS, (believe it or not!). In 1959 they published Revenue Ruling 59/60. The revenue ruling is still used by many accountants and business appraisers today. It is useful as a starting point and consists of the following:

– The nature of the business and its history from inception.
– The general economic condition and outlook of the specific industry.
– The book value of the stock and the financial condition of the business.
– The earning capacity of the business.
– The dividend paying capacity.
– Whether or not the enterprise has good will or other intangible capacity.
– Prior sales of stock and the size of the block to be valued.
– The market price of the stocks of corporations engaged in the same or similar line of business, having their stocks actively traded in a free and open market.
– For more information on Revenue Ruling 59/60 go this link: http://www.equityvaluationappraisals.com/pdf/IRS-Revenue-Ruling-59-60.pdf

Although formulas, rules of thumb and industry specific multiples are helpful, using a certified valuation analyst “CVA” is a real good idea. Especially if you are engaged in the gifting of stock or other estate planning and wealth shifting strategies. However, probably the easiest and most unsophisticated way to determine the value of your business is asking yourself what you would pay for your business if you were on the outside looking in and knew all the inside information.