in this article you will find why it's important to do business valuation, the reasons include buying or selling stocks from/to other family members, leaving gift to heirs and anticipating tax problems.
also it states the problems and advantages of doing a valuation
problems might be:
- that financial numbers and statements don't tell the true performance of the company
- to give the the company to the heirs at a wrong price
- might have environmental problems that prevents it from achieving the owner's estimated value
advantages:
- will know surplus and non operating assets that might be valuable and some family members didn't know about.
- fair value and share price
Interesting post, Youssef! The first thought that actually came up in my mind was about the concept of socio-emotional value and its role when a family firm valuation is done by a Family CEO.
ReplyDeleteFamily owners do care for their family business as they nurture it through start-up and growth. They also “use” the firms to receive benefits from it. By interacting over time with the family business, the family extends itself into the business and family members slowly develop a strong sense of identification with the family business and can have difficulty separating their mental concepts of the business from the family.
FBs’ owners gain socio-emotional benefits from firm ownership and these benefits tend to positively influence their perceptions of the financial value of the firm. Owners have strong socio-emotional attachments to their businesses which affect the families’ perceptions and valuation of the financial value of the firm (“endowment effect”, which increases the value of the business when an individual owns or controls it relative to the value that the same individual would place on it when attempting to buy it) (Thaler, 1980).
The efforts to secure or protect socio-emotional value can influence economic performance as well as decision-making. Moreover, by affecting the acceptable price for the business, socio-emotional value can play an important part in the family’s choice between intra-family succession (‘trans-generational sustainability’) and selling the business (Chua et al., 1999).
References:
- Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization 1 (1), 39-60.
- Chua, J.H., Chrisman, J.J., Sharma, P. (1999). Defining the family business by behavior. Entrepreneurship Theory and Practice 23 (4), 19-39.