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Valuations of businesses, securities and intangible assets are commonly required in the context of regulatory oversight and compliance. Valuations, therefore, are sought in connection with:
- Estate and gift tax filings
- Charitable donation deductions
- Establishing basis in converting from a C corporation to an S corporation
- Incentive stock plans
- Application for 501 (c) (3) status
- Conversions of not-for-profit entities to for-profit status
- Sales of not-for-profits to for-profits
- E.S.O.P. reporting
- Allocation of purchase cost to fixed and intangible assets for GAAP and tax purposes
- Transfer pricing
- Goodwill impairment
In all of the above matters, fair market value is the appropriate, if not required, standard of value. Fair market value is defined as the cash price that would likely be agreed upon by a seller willing but under no compulsion to sell and a buyer willing but under no compulsion to buy, both having reasonable knowledge of relevant facts.
In conducting such a valuation, the financial advisor should consider all of the factors set forth in IRS Revenue Ruling 59-60 (1959 – 1, C.B. 237), including:
- Nature and history of the business;
- Economic outlook and condition of the industry;
- Book value of the stock and financial condition of the business;
- Earning capacity of the company;
- Dividend-paying capacity;
- Goodwill and other intangibles;
- Prior sales and size of the block to be valued; and
- Market price of similar stocks actively traded in open markets
There are numerous techniques and formulae for determining the value of a going concern, its issued securities and intangible assets. In the selection of the appropriate methodology(ies), many factors, including federal and state statutes, administrative rulings and guidelines and case law, must be considered, in addition to generally accepted appraisal standards.