Asset evaluation is the process of assessing the value of a company, real property or any other item of worth, in particular assets that produce cash flows. Asset valuation is commonly performed prior to the purchase or sale of an asset or prior to purchasing insurance for an asset. Asset valuation can be based on cash flows, comparable valuation metrics or transaction value.
Advantages of Proper Asset Evaluation
1. To Be Prepared for Unsolicited Offers or Unforeseen Events
Business owners often receive unsolicited offers for their business, and they may not have a solid grasp of the value of the business. Worse yet, a business owner may rely on distorted market information related to value that many times involves vague details related to the terms of the transactions. As a result, a business owner’s opinion of the value of the business may be formed without the benefit of reliable market information and without availability to the details surrounding the transactions. The valuation provides information in the event of unsolicited offers or unforeseen events, putting the business owner on a level playing field when having to make important decisions relative to their most important asset.
2. To Be in a Position of Strength When Negotiating a Sale
The sale of the business is frequently the single most important financial transaction in the business owner’s life. Potential buyers for the business are typically savvy investment professionals that purchase businesses as a regular aspect of their line of work. In order to level the playing field, the business owner must be armed with all relevant factors that impact the value of the business.
3. To Manage Tax Transactions Efficiently
A well-documented business valuation is frequently an integral component of effective tax planning strategies related to a private business. For example, the income tax characterization of incentives to key executives as capital gains rather than ordinary income may be supported by tax planning structures that rely on sound valuations. The valuation of business interests on a minority interest basis is a commonly used technique that provides reduced estate and gift taxes when minority interests are sold or transferred to family members.
4. To Be Armed to Question a Potential Buyer’s Valuation
A business owner may be offered a high value for the business to grant an exclusive period during due diligence, thus restricting the owner’s ability to negotiate with other buyers. In another scenario, the business owner may be offered an unreasonably high price with the caveat that the transaction is to be funded primarily with seller financing, leaving the business owner with virtually all of the risk and no control over the business. Situations such as these illustrate the fact that the business owner needs to be fully armed with all information related to the value of the business needed to negotiate favorable price and terms with a potential buyer.
5. To Aid in the Avoidance of Buy-Sell Disputes
For private businesses that have multiple parties that hold equity, the business valuation is a powerful tool to use in the establishment and execution of a buy-sell agreement, minimizing the risk of disputes related to the agreement. During the establishment of the buy-sell agreement the appraiser can play a critical role in assisting legal counsel in defining the level of value (e.g., majority interest basis or minority interest basis), so that the appropriate level of value may be used given the specific event that triggers the buy-sell agreement. An annual valuation sets a precedent for the value of the equity, whereas a single valuation that is prepared at the time a triggering event occurs is more vulnerable to claims of bias.
6. To Protect the Value of the Business
A well prepared and reported valuation of the business will highlight weaknesses in the business, providing opportunities for business owners to mitigate weaknesses and prevent further erosion of value. Similarly, threats to the business are also identified in the valuation process, providing an opportunity for the business owner to be proactive in meeting those threats.
7. To Enhance the Performance of the Business
An annual valuation of the business may be used as a benchmark to assess the performance of the business in its execution of the corporate strategic plan. A series of annual valuations provides objective information to shareholders so that they may evaluate management and make appropriate changes. An annual valuation also provides clear performance metrics and promotes accountability.
Contact Us
If you have further inquires, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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