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Family business: Major reasons for a business valuation

Why value a private family business?

Identify and discuss what you believe to be the major reasons for valuation.

Solution Preview

A true business valuation is unlike an appraisal of an asset, such as real property, or equipment. A valuation assesses the income stream that a business projects in addition to the hard assets owned by the entity. The income stream is determined by considering what an investor would pay to own that income, much as an investor might consider the return on any type of investment.

There could be several particular reasons for valuing a family business:

1. A divorce action will almost certainly guarantee some sort of valuation to accommodate the splitting of assets. Even though the business may be owned and operated by only one of a couple, the other is entitled to half of the value.

2. In a family business when children or other relatives are involved (more than the initial husband and wife), the same issue is relevant for a divorce of one of the members of the business, even if it is a minority interest.

3. For estate planning purposes, a valuation is often prepared in order to ...

Solution Summary

The 670 word solution presents 14 separate reasons that a family business might want or require a business valuation. The solution also explains the difference between an appraisal and a valuation.

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