Are Business Valuation Fees Tax Deductible?

Whether you want to sell your company, plan for the future, develop more effective financial and marketing strategies, or simply gain a solid idea of your standing and potential for growth, a business valuation is an invaluable process – and tool that you can leverage to achieve key goals. You likely have questions about the process. What is a business valuation professional, and what can they offer you? How does this all work? Are business valuation fees tax deductible? Let’s find some answers.

What Is a Business Valuation Professional?

To answer this, we’ll back up a moment to the question: what is a business valuation? This is a process that determines the value of an organization. It is an essential step if you are looking to sell, but it’s also necessary for a variety of other reasons including establishing partner ownership, tax purposes, and even evaluating assets in divorce proceedings.

A business valuation professional provides an objective estimate of your business’s value. This is a difficult task for owners who are often quite biased and either over or undervalue the entity they’ve worked diligently to establish. The valuation pro looks at various factors to arrive at an accurate estimate. They:

• Analyze the capital structure
• Analyze future earnings prospects
• Evaluate the market value of assets
• Perform an objective analysis of the management team/structure 
• Value intangible assets, including trademarks, copyrights, securities, and goodwill
• Prepare merger and acquisition studies
• Conduct financial studies (e.g. employee stock ownership feasibility analysis)

Common Business Valuation Methods

When asking the question are business valuation fees tax deductible, many people start with a search on business valuation itself. The methods, strategies, costs, etc. Valuing a business is challenging and complex – no surprise there! There are endless moving parts, and as we all know, the world is changing minute by minute. That said, there are some tried and true methods that business valuation professionals utilize to determine an organization’s economic worth. These include:

Market Capitalization

To arrive at a value via this method, one multiplies the business’s share price by the total number of outstanding shares. This is Google and Microsoft-level valuation and typically does not apply to SMEs.

Times Revenue 

Here, the valuation expert takes a stream of revenues over a certain period and applies a multiplier depending on the industry and economy. For example, a tech firm may be valued at 3 times revenue. 

Earnings Multiplier 

With this method, we compare the current stock price against earnings per share.

Discounted Cash Flow 

The business valuation professional looks at projections of future cash flow, adjusted to arrive at the current market value. It takes inflation into account – a key factor today. 

Book Value

This is another relatively simple equation, once all of the relevant documents have been examined. You subtract total liabilities from total assets to arrive at the value.

Liquidation Value

If you were to liquidate all assets and pay off all liabilities now, this would give you your liquidation value.

There are other methods, and the right approach depends on the valuation professional and the nature of your business. 

Select a professional who has earned the professional designation, Accredited in Business Valuation (ABV), overseen through the American Institute of Certified Public Accountants. Professionals must apply, pass an exam, meet requirements in terms of education and experience, and maintain certification through continued learning.

Are Business Valuation Fees Tax Deductible?

Selecting an experienced business valuation professional is key – but another important consideration is: are business valuation fees tax deductible? The answer is… it depends.

If you need a valuation as you make a decision to purchase a business, then no. These are considered capital costs and are, thus, not deductible. If you are using a valuation to borrow money for the business, however, they are allowable as deductions under certain circumstances. It is important to consult the valuation expert and your tax preparation professional/attorney.

Contact AMB Performance Group 

Gaining insight into the economic value of a business is essential for many reasons, whether you are buying, selling, undertaking a shift, or preparing for a stronger future. To learn more about the process, and how AMB Performance Group can help you use valuations to meet your goals, contact our team today.