Valuation of Family Businesses Can Pose A Challenge

Family-owned businesses are not usually run like large public companies and working together can bring out the best and worst in a family owned business entity. Here are four Key questions that business valuation professionals ask when valuing a family owned company.

1. Are Family Members On The Payroll?
The terms family owned business and nepotism often go hand in hand. While some business owners hire only trustworthy and qualified family   members, many hire them out of a sense of obligation or a desire to pass on the business to the next generation. When valuing these businesses,  the business valuation professional will objectively consider if the employee family members are qualified for their positions and is the compensation paid and employee benefits provided to them reasonable based on market comparisons.

2. Are There Other related Party transactions Other Than
Compensation and Benefits?

Family owned business may engage in other transaction  with family members such as building and equipment
rental and supplier contracts. Once again the business  valuation professional will need to evaluate these payments
to see if they are reasonable based on market comparisons.

3. Is The Business Management Style  Casual or Formal?

Family owned business generally have a less formal  management style and favor employee trust over
documented and written procedures for operations.  The loose management style of many family businesses
can lead to weak internal control and even fraud. The  valuation professional will take this into consideration
when reviewing business records.

4. Is a Key Person Discount Required ?  A typical approach to quantifying the need for a key  person discount is estimating the monetary loss for the company should the key person depart by considering  the key person’s skills, any customer relationships, and
if there are signed employee non-compete agreements.

 

Some of the largest and most successful business in the United States are run by families. Experienced Valuation
professionals recognize the common issues that family owned entities encounter and when necessary will adjust
valuation procedures and analysis to estimate how much these businesses would be worth to third party buyers in
an arms length transactions.

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New IRS Proposed Regulations Could Eliminate Valuation Discounts in Closely Held Family Entities

On August 2, 2016, The IRS released proposed regulations under Internal Revenue Code
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