ValuAdder Business Valuation Blog

For valuation of companies that pay income taxes at the entity level the business appraisal needs to take this into account. In a vast majority of professional business valuations you are likely to see, the local (e.g. state) and national (e.g. federal) income taxes are combined into a composite income tax rate.

In the US, this can be around 35% – 40% of the pretax business income. Coming up with a greater level of precision in estimating the effect of income taxes on the business cash flow forecast would likely require participation of a highly skilled tax professional. In practice though, the effect of resulting adjustments to business cash flow is far less than the margin of error in the earnings forecast itself.

There are situations where you may need to involve an experienced tax accountant in order to assess the effect of income taxes on your earnings forecast. Most business appraisers though consider the composite tax rate assumption good enough.

Business Valuation of Pass-Through Entities

Many privately owned companies do not pay income tax at the entity level. The effect on business cash flow and, therefore, its value needs to be considered when valuing such firms.

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