How do you put a value on an estate where a large part of that estate is tied up in a family business?
That type of problem can be difficult for attorneys and clients to address, simply because there’s more than one way to value a business.
For the family, there may be a huge emotional value. One or more of your heirs may see the business as something worth far more than its actual value, simply because it has always been the family business.
Other heirs may see it from a purely financial perspective — but, even then, the true value can be hard to assess.
For the purposes of estate planning, the financial value of a business can usually be determined in one of several ways:
1. The market approach looks at the going rate for businesses similar to yours. What are other businesses of a similar size, providing similar services, going for on the open market? If you sold the business today, including all of its assets and intellectual property, what could you expect to get for it?
2. The asset method examines the business for its assets and its liabilities and then attempts to determine what it would cost to recreate another business just like it. This can be complicated to do, especially when you get down to discussing some of the unique aspects of the business, like what exactly brings customers through the door. Is it reputation? Is it service? Is it a combination of factors? How can those be priced?
3. The income valuation looks at the business from probably its most practical angle: wWhat sort of income does it bring in, right now? What sort of income is it expected to bring in as time goes on? Is the business in decline or on the upswing?
There are other ways, naturally, that a family business can be valued for the purposes of estate planning. Taking those first steps can help you figure out the most appropriate way to divide your business (or not) between your heirs once you are gone.
For assistance with the valuation of your business and other assets as part of estate planning, talk to an attorney today. For information on how our firm approaches the issue, please visit our page.
