Business Valuations: When You Need One and What It Actually Costs

"What's my business worth?" is one of the most common questions I get. And the answer is always: "It depends on why you're asking."

A business valuation isn't just a number — it's a conclusion that depends on the purpose, the standard of value, and the methodology applied. Get it wrong, and you could overpay taxes, underprice a sale, or fail to qualify for financing.

When you need a valuation:

1. Buy-sell agreements — Every partnership and multi-member LLC needs a buy-sell agreement with a valuation mechanism. Without one, you're inviting a lawsuit when someone wants out.

1. Estate and gift tax planning — Transferring business interests to the next generation requires a defensible valuation. The IRS will challenge aggressive discounts.

1. SBA loans — Buying a business with SBA financing requires an independent valuation.

1. Divorce proceedings — Business interests are marital property. Both sides need credible valuations.

1. Partner disputes — When partners disagree on value, an independent valuation provides the neutral ground.

What it costs:

The three approaches:

1. Income approach — What future cash flows is the business expected to generate? (Most common for operating businesses)
2. Market approach — What have similar businesses sold for? (Useful when comparable data exists)
3. Asset approach — What are the net assets worth? (Common for holding companies and asset-heavy businesses)

Discounts matter:

If you own a minority interest or the shares are restricted, discounts for lack of control (DLOC) and lack of marketability (DLOM) can reduce the value by 20-40%. These discounts are legitimate but must be supported.

The bottom line: A proper valuation is an investment, not an expense. It protects you in transactions, planning, and disputes. Don't try to do it yourself, and don't hire someone who's never defended a valuation in front of the IRS.