If you expect that your business valuation results will be reviewed by tax authorities, you may need to prepare a business appraisal report that meets several key requirements.
In the US, for example, the Internal Revenue Service has published the Revenue Ruling 59-60 in 1960. This central publication outlines a number of requirements that a business appraisal report must meet in tax related situations:
- The report must provide a complete description of the business operation history.
- You need to include review of the economic conditions that affect your business and its industry.
- There should be a discussion of the company’s financial condition, indicating the book value of its shares.
- The business appraisal report must offer a solid analysis of the business earning capacity.
- In some cases, you may need to review the ability of the business to pay dividends.
- The presence and value of business goodwill needs to be determined.
- If the company offers its stock for sale, the size of the block being valued needs to be specified.
- Market prices of actively trading stocks of businesses in your industry.
Most small businesses do not pay dividends. If this is your case, your business valuation report needs to include well prepared business earnings forecast. In addition to satisfying the tax authority requirements, such cash flow projections are essential for accurate business valuation under the income approach.