Valuing the Closely Held Firm

Sometime during the life of every closely held business, the owner must plan for the eventual transition of ownership and control of the firm. To make correct decisions regarding the transfer of ownership interests in the business, the owner must be able to determine the appropriate value of the firm.

Other reasons for valuing the closely held firm include:

1. realignment of operating units;

2. establishing the value of a company considering an initial public offering;

3. the establishment of stock benefit plans; and

         4. determining estate and gift taxes.

In a closely held business, family members or a small group of individuals own the stock. Generally, no shares are in the hands of the general public. Accordingly, establishing a market value for the firm is a difficult and complex process.

Book value often bears little, if any, resemblance to market values since the balance sheet represents the historical cost of fixed assets, which may be substantially different from market value. The asset's ability to produce earnings or positive cash flows is the fundamental determinant of value.

The IRS and court decisions have had a major impact on the valuation process. These parties agree that a range of values is typically preferable to a single value and that the valuation process should consider all relevant information.