When Do You Need a Business Valuation?
Every business owner will face at least one situation requiring a professional valuation—the question isn't if, but when.
Primary Valuation Categories
Court-mandated, regulatory, and statutory requirements where professional valuation is legally required.
- • Divorce proceedings
- • Estate & gift tax
- • Shareholder disputes
- • Regulatory compliance
IRS requirements, financial reporting standards, and tax planning scenarios requiring formal appraisals.
- • IRC Section 409A compliance
- • ESOP transactions
- • Charitable contributions
- • Financial reporting
Business planning, transactions, and strategic decisions where valuation provides critical insights.
- • Merger & acquisition
- • Buy-sell agreements
- • Investment decisions
- • Succession planning
Legal & Compliance Requirements
Divorce & Family Law
- • Marital property division
- • Spousal support calculations
- • Prenuptial agreement disputes
- • Child support modifications (business income)
- • Separate vs. marital property determinations
Corporate Disputes
- • Shareholder oppression claims
- • Dissenting shareholder rights
- • Partnership dissolution
- • Minority squeeze-out transactions
- • Breach of fiduciary duty claims
Court Standards
Courts typically require qualified, independent appraisers meeting jurisdiction-specific standards. The appraiser must demonstrate expertise in the industry and valuation methodology, and be able to withstand cross-examination.
Financial Services
- • Bank regulatory capital requirements
- • Insurance company solvency testing
- • Investment fund compliance
- • Broker-dealer net capital rules
- • Credit union supervisory requirements
Public Company Requirements
- • SEC reporting obligations
- • SOX compliance requirements
- • Fair value accounting (ASC 820)
- • Impairment testing
- • Related party transaction approvals
USPAP Compliance
Uniform Standards of Professional Appraisal Practice (USPAP) or other recognized professional standards may be required for certain litigation and regulated contexts
Independence Requirements
Appraiser must be independent from all parties with no financial interest in outcome
Credentialed Appraisers
ASA, ABV, CVA, MAFF, or other recognized valuation credentials often required by courts and regulators
NACVA Professional Standards Compliance
The National Association of Certified Valuators and Analysts (NACVA) maintains comprehensive Professional Standards that meet or exceed requirements for most valuation purposes. NACVA-credentialed analysts (CVA, MAFF) follow rigorous development and reporting standards ensuring defensible, ethical valuations.
Development Standards
- • Appropriate methodology selection and application
- • Comprehensive economic and industry analysis
- • Thorough company-specific risk assessment
- • Multiple valuation approach consideration
Reporting Standards
- • Summary Reports for informed users
- • Detailed Reports for regulatory compliance
- • Calculation Engagements for limited scope
- • Complete work paper retention (5+ years)
Tax & IRS Requirements
Mandatory Appraisal Scenarios
- • Gifts exceeding annual exclusion ($19,000 in 2025)
- • Estate tax returns (Form 706)
- • Generation-skipping transfer tax
- • Charitable deduction claims over $10,000
- • Partial interest gifts (fractional interests)
IRS Scrutiny Areas
- • Family limited partnerships
- • Valuation discounts over 35%
- • Closely-held business interests
- • Serial gifting strategies
- • Subsequent sale transactions
IRS Penalty Protection
Qualified appraisals meeting IRS requirements may provide penalty protection under IRC Section 6664(c)(3) if the valuation is later challenged, provided the taxpayer acted in good faith and relied on the professional appraisal.
IRC Section 409A
- • Stock option pricing
- • Deferred compensation plans
- • Employee stock purchase plans
- • Phantom stock arrangements
- • Annual compliance certifications
Employee Benefits
- • ESOP annual valuations
- • 401(k) company stock funds
- • Stock appreciation rights
- • Employee ownership plans
- • Benefit plan asset allocations
GAAP Requirements
- • Purchase price allocations (ASC 805)
- • Goodwill impairment testing (ASC 350)
- • Fair value measurements (ASC 820)
- • Asset retirement obligations
- • Share-based payment arrangements
Audit Requirements
- • Annual impairment assessments
- • Investment portfolio valuations
- • Intangible asset measurements
- • Business combination reporting
- • Level 3 fair value disclosures
Understanding Standards of Value
The appropriate standard of value significantly impacts the conclusion and must align with the purpose
Primary Standards
- Fair Market Value: Estate/gift tax, many litigation matters
- Fair Value: Shareholder disputes, financial reporting
- Investment Value: Strategic transactions, specific buyers
- Intrinsic Value: Investment analysis, fundamental value
Professional Methodology
Credentialed valuators consider three approaches with professional judgment determining appropriate weighting:
- Income Approach: Present value of future cash flows
- Market Approach: Comparable company and transaction analysis
- Asset Approach: Adjusted net asset value
Note: ASC 820 defines fair value differently than IRS fair market value. Professional judgment is required to select the appropriate standard for each engagement.
Strategic Business Applications
M&A Transactions
- • Initial price guidance and negotiation range
- • Fairness opinions for board approval
- • Due diligence support and validation
- • Purchase price allocation assistance
Buy-Sell Agreements
- • Annual valuation updates
- • Trigger event valuations (death, disability)
- • Retirement buyout calculations
- • Performance-based adjustments
Succession Planning
- • Management buyout structuring
- • Family succession gift strategies
- • Employee stock ownership plans
- • Key executive retention plans
Equity Compensation
- • Stock option exercise pricing
- • Equity incentive plan design
- • Performance unit valuations
- • Carried interest allocations
Capital Raising
- • Investor presentation support
- • Convertible security pricing
- • Debt vs. equity analysis
- • Dilution impact assessments
Strategic Planning
- • Investment opportunity analysis
- • Capital allocation decisions
- • Performance benchmarking
- • Value creation initiatives
Risk Management
- • Insurance coverage assessments
- • Business interruption claims
- • Key person life insurance
- • Buy-sell funding requirements
Valuation Requirement Decision Matrix
Quick reference guide for determining valuation requirements across different scenarios
Critical Documentation Requirements
Professional valuation standards mandate comprehensive documentation throughout the engagement. This isn't bureaucracy—it's your protection against challenges from the IRS, opposing parties, or regulatory bodies.
Essential Documentation Elements
- Information Sources: Every document reviewed, database accessed, and interview conducted must be catalogued
- Assumptions & Limiting Conditions: Clear disclosure of all assumptions underlying the valuation conclusion
- Methodology Support: Detailed explanation of why specific methods were selected or rejected
- Reconciliation of Approaches: When multiple methods are used, explicit weighting rationale
- Work Paper Retention: Professional standards require maintaining complete work files for a minimum of five years
Documentation Best Practices
- Real-time Documentation: Document analysis as it occurs, not after completion
- Source Attribution: Every fact, figure, and assumption must have a documented source
- Version Control: Maintain clear version history of all documents and analyses
- Quality Review: Implement systematic review processes for all documentation
- Electronic Storage: Secure, searchable storage with appropriate backup systems
Critical Warning
Inadequate documentation is one of the most common reasons valuations fail under scrutiny, even when the conclusion itself is reasonable. Professional standards require comprehensive documentation for defensibility.
Avoid These Costly Valuation Mistakes
Many professionals assume that internal calculations, broker opinions, or rule-of-thumb estimates will satisfy legal or regulatory requirements. This can lead to IRS penalties, court challenges, or regulatory violations.
Solution: Engage qualified appraisers for any legal, tax, or compliance-related valuation need.
Rushing valuation work leads to inadequate analysis, limited appraiser availability, higher costs, and increased risk of challenges. Complex valuations typically require 4-8 weeks, though extensive engagements may take longer.
Solution: Plan valuations well in advance of deadlines and key events.
Business values change rapidly due to market conditions, performance, and other factors. Using stale valuations for current transactions can result in significant over or underpayment and potential legal challenges.
Solution: Obtain current valuations for all transaction and compliance purposes.
Courts, the IRS, and regulatory agencies scrutinize appraiser qualifications carefully. Using appraisers without proper credentials, experience, or independence can invalidate the entire valuation.
Solution: Select credentialed appraisers (ASA, ABV, CVA, MAFF) with relevant industry experience and independence as defined by applicable professional standards.
Valuation Planning Checklist
Essential steps to take before engaging a business appraiser
Define Requirements
- Identify specific valuation purpose and standard
- Determine required valuation date
- Understand legal/regulatory requirements
- Assess timeline and deadline constraints
Select Appraiser
- Verify appropriate credentials and experience
- Confirm independence from all parties
- Review industry and methodology expertise
- Assess litigation/regulatory experience if needed
- Confirm appraiser holds appropriate credentials for the specific purpose
Prepare Documentation
- Gather 3-5 years of financial statements
- Compile tax returns and supporting schedules
- Organize corporate records and agreements
- Prepare operational and strategic information
Engagement Planning
- Define scope and deliverables clearly
- Establish realistic timeline and milestones
- Address confidentiality and privilege issues
- Plan for ongoing communication and updates
Our NACVA-credentialed professionals ensure your valuation meets all applicable standards while providing practical, actionable insights for your business decisions.
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