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How Will A Business Be Valued In California?


Business valuations are tricky in California. The obvious and easy parts are tangible assets, such as inventory, equipment, land, fixtures, and all of the property that the business owns. Next would be the intellectual property owned by the business, such as copyrights, trademarks, patents, and trade secrets. The most difficult part for the valuation is the goodwill, which is the worth of the business as an ongoing entity. This is usually determined to be a multiple of the gross sales of the business or the gross receipts of the business. Gross amounts are used so that there aren’t arguments about which things would be deducted from the gross if we were using a net amount. We also use a much smaller percentage of the gross than we would if we were using the net income of the business. Some businesses are easier to value than others. There are some guidelines for valuing the goodwill of a business depending on the type of business it is, and there are business appraisers who can give pretty reliable valuations of businesses to owners so that they know the true value of the business.

How Can The New Owner Pay For the Business?

Most often, a new owner will pay for the business through a combination of financing and insurance. For planned transfers such as retirement, the new owners would use some sort of financing or some combination of financing. This could be through the bank or the small business administration. It could be owner financing where the seller carries the note for the financing. This has some additional potential tax advantages for the seller but also carries some additional risks.

If there is no owner who can come through with the financing or the cash but there is someone from management and there is a relatively large pool of employees, then it could be done through an employee stock ownership program, which would allow the employees to act as a group in purchasing the business (this comes with some significant tax advantages as well). If it’s an interfamily transfer between parents and children or grandchildren, then there could be some gifting, which could help with inheritance tax issues. In other words, we can gift portions of businesses and have that be leverage so that it would cause less of a tax impact than the actual value of the business; for involuntary transfers such as death or disability, we can ensure this. Buy-sell agreements are beneficial in that they create insurable interest so that the parties for the buy-sell agreement can purchase insurance on each other or the business as an entity and purchase insurance on the parties. If one of those events occurs and it leads to a buyout, then this insurance is there to fund all or a portion of the buyout so that it doesn’t rest entirely on the purchasing member.

Are There Tax Issues To Consider In Business Transfer Planning?

There are significant tax issues to consider in business transfer planning. Income tax, capital gains tax, gift tax, and inheritance tax all come into play with the transfer of a business, and the only way to minimize or plan for these taxes is to start planning the business transfer early on so that the transfer can be structured in such a way as to minimize or defer those taxes.

Why Don’t Business Owners Plan For Transfer?

The reason most business owners don’t plan is because they think it is premature to do so since they are not planning on retiring right away. Others say it’s just too late, but it’s never too late to plan—a person can at least have something in place and state their wishes. Another reason many business owners don’t plan is because they are too busy. I myself am a business owner, and I understand that, but we need to be able to prioritize and make time for things that are important to the business and to our families.

Next is a loss of privacy, since there is a certain amount of disclosure that takes place between the business owner and the potential buyer or potential new management. Along with that is a loss of control or an intentional transitioning of control. These are things that one must be prepared to do in order to see their business continue. There is no good candidate for the transition; my only advice is to keep seeking and looking for a candidate and to find someone who maybe isn’t perfect now, but could learn and is teachable. If there is no plan and the business owner dies or becomes incapacitated, it’s going to create family strife and family conflict. There is going to be a lost opportunity to do tax planning and it’s more likely that the business will fail than if there had been planning.

According to the US Small Business Administration, by the third generation, 88 percent of businesses fail, and by the fourth generation, 97 percent fail. This is due to a lack of planning. When planning is done, transitions are much smoother and the chances of success with the next generation increase greatly.

For more information on Valuing A Business In The State Of California, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (626) 385-6303 today.

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