How To Put a Value on an LLC: Everything You Need To Know
It is important to understand if you're thinking about buying or selling shares in a limited liability company which is often the most difficult part.3 min read
How to put a value on an LLC is important to understand if you're thinking about buying or selling shares in a limited liability company which is often the most difficult part. This requires determining the company's total value with an appraisal, then multiplying this figure by your ownership percentage. Most LLC operating agreements clearly define the formula and criteria for valuing membership shares. An LLC is a business entity that combines attributes of a partnership and corporation, offering flexible taxation and limited liability.
Methods of Valuation
The income method or the market value method is typically used to appraise an LLC. Your company's operating agreement may specify which method should be used.
The market value method examines the valuations of similar companies that have recently sold. Ideally, these market comparisons should have similar financial attributes. The transactions must reflect fair market value, which means that both parties were apprised of the facts and agreed without coercion.
With the income method, your LLC is valued based on the average monthly income for the last 24 to 36 months. Then, add the amount of cash reserves and subtract any debts. The result should be multiplied by a factor established by the members to arrive at the company's value. The factor used depends on the industry and the stability of the company; it is often established in the company's operating agreement.
In both cases, you and the other members should discuss other factors that may affect the price, such as the overall finances of the company, your current tax situations, and the number of employees you have, as well as any other variables that could impact the price.
To calculate the company's book value, add the value of all assets including real estate, vehicles, inventory, income, and bank accounts. Then, subtract all your liabilities from the total. To find the straight book value, include the value of any brand names, trade names, copyrights, patents, and intellectual property as agreed upon by members.
With the straight book value, you can use the capitalization of earnings method to project estimated profit for the next few years. Add this projection to the straight book value to determine company value.
In some cases, member disagreements can occur. For best results, have a complete appraisal of your company's value conducted by a professional who can present their findings to you and any partners for review.
For example, look at the percentages owned by each of your members. If a new investor wants to purchase 35 percent of the company, each of your current members would need to give up 35 percent of their ownership stakes.
The interest of each member is the value of the rights he or she holds. This includes their profit-sharing abilities, voting rights, and financial investment.
Because minority interests have limited control over LLC operations, they are typically discounted when calculating value. The specifics of each situation determine the strength of a member and the subsequent discount amount. For example, some members without a controlling interest may still carry substantial influence. The number of approval votes required, which is dictated by the operating agreement, indicates a minority member's level of control. The total number of members also plays a role in whether a minor shareholder can successfully block actions.
The LLC operating agreement should dictate special requirements that apply when a member wants to sell his or her interest in the company. For example, approval from the other members may be required so that the members can retain control over who holds shares in the company. The agreement also dictates how a member's interest, which includes voting rates, investment, and profit sharing, can be transferred after his or her death. For example:
- Unanimous member approval may be required for shares to be transferred to a non-family member.
- Non-family members who receive interest in an LLC can share in profits and losses but do not have a say in the operation of the business.
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