There are a multitude of reasons to get a business valuation. Determining the tangible and intangible assets of your business is always important, whether you are shaping your business strategy, getting ready to acquire another business, or buying out a partner. Business appraisals are a complex process, so companies look to certified third-party valuation firms to ensure their data is accurately represented in their valuation.
This is especially true when a valuation is conducted for tax purposes, which introduces additional layers of complexity into the process. A business valuation becomes more elaborate when you consider multinational companies who operate globally. Certain intercompany factors need to be addressed to comply with your tax reporting, and these factors are typically determined by the income approach since the other approaches (market and asset) can be more limiting.
Here is an example scenario: A company just acquired another company’s stock. They plan to transfer patents to an entity that is located outside of the country, so they need to obtain a valuation of each patent. The products that are protected by these patents will be sold to customers and related parties, and these sales will be controlled by intercompany transfer pricing agreements.
When doing a business valuation for tax purposes, some of the factors that must be explored include intercompany transactions, the nature of the entity, transfer pricing, intellectual property, and tax rates. Below we will take a look at each.
This data is vital, yet often misunderstood. These can include financing, sales of a company’s goods or services, and how they are using their intellectual property. If these are not included, your business can be severely undervalued. It also raises red flags and could get your company in trouble with the IRS.
Nature of the entity
The nature of the entity guides the entire valuation process. Commonly, this impacts holding companies that have minimal operations, intangible holding companies, and full-service operating companies. Different approaches are used depending on the company in order to accurately determine value.
This is another vital but overlooked part of a business valuation. It is important to make sure that these factors (profit margins, revenue, etc.) are consistent so the data is not contradicting.
In certain circumstances, some entities do not maintain IP rights, while full-service entities do. Without IP rights, an organization may have lower profit margins and risk. IP needs to be accounted for in a business appraisal.
If an organization keeps its earnings in the country it is located in, you have to consider the tax rate of the specific area. However, if that company will repatriate its earnings back to the U.S. shareholder, you must consider U.S. tax rates and understand how to report for foreign tax credits.
It is important to eliminate potential tax issues that could arise with an inaccurate business valuation, so make sure you are working with an independent valuation firm you can trust.