“Great legacies do not occur by chance - they're well planned.”
- Donald Fletcher
Legacy Analytics Limited
4902 Tollview Dr.
Rolling Meadows, IL 60008
Business valuations are costly because the standard valuation performed today is "The 59-60 valuation" which has been the most accepted standard since IRS Ruling 59-60 was issued in 1959 (as the 60th ruling of that year it was named "59-60"). It became the standard methodology because valuations are often done for tax reasons which require that IRS 59-60 guidelines be strictly adhered to.
The guidelines for 59-60 valuations are complex and should only be attempted by a professional, but to simplify them, there are three key elements:
- Consideration of an income approach (which uses capitalization of earning to value the company’s income stream);
- Consideration of a market approach (which tries to calculate value for the subject company based on the value of other similar companies whose value has been made public); and
- Consideration of an asset-based approach (which is simplistically determined by the company’s assets).
As noted above, a 59-60 valuation is only required when filing a tax return (and would be strongly advised if the business gets dragged into courtroom litigation). However, many if not most, valuations are not performed for tax reasons but still follow 59-60 guidelines. Hence, they incur high costs with the unfortunate side-effect of many business owners avoiding them.
The result: Most entrepreneurs avoid having valuations which increases their risk of making uninformed, and consequently poor, business decisions regarding the single biggest asset in their portfolio . . . their business.
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