Key Takeaways:

  • Valuation Methods: LLC valuation typically uses income or market value methods; the choice depends on the financial structure and industry.
  • Book and Intellectual Property Values: Book value includes tangible assets, while intellectual property and brand value require member consensus.
  • Minority Interest Factors: Minority interests may be discounted due to limited control, depending on voting rights and company structure.
  • Legal and Restriction Clauses: The operating agreement outlines restrictions on transferring membership, often requiring majority or unanimous member approval.
  • Professional Appraisal Importance: Engaging a professional appraiser can aid accuracy and help prevent member disputes during valuation.

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.

Additional Valuation Approaches for LLCs

In addition to the income and market value methods, LLCs may also benefit from other specific valuation approaches:

  1. Asset-Based Approach: This approach focuses on the company’s net asset value, considering both tangible and intangible assets. Subtracting total liabilities from total assets gives a baseline company value. This method works best for companies with significant physical assets but is less suitable for high-growth companies with fewer tangible assets.
  2. Discounted Cash Flow (DCF) Method: DCF values the LLC based on projected future cash flows, discounted to present value. This approach is useful for companies with reliable revenue forecasts, such as those with long-term contracts or subscription models, as it accounts for both immediate revenue and long-term growth potential.
  3. Comparable Company Analysis (CCA): Similar to the market approach, CCA involves comparing the LLC with other companies of similar size and industry. However, it goes further by looking at specific metrics such as revenue multiples or earnings before interest, taxes, depreciation, and amortization (EBITDA) to adjust for differences in operations.

Minority Interests

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.

Discounts on Minority and Marketability Interests

A minority interest in an LLC often requires a discount for limited control or influence over business decisions. Additionally, marketability discounts may apply if an LLC interest lacks liquidity, meaning the ability to sell shares quickly without a loss in value. For example:

  • Minority Discounts: These discounts reflect a member’s lack of authority in significant business decisions. If minority members lack voting rights or cannot influence major actions, a discount of 10–30% may apply.
  • Marketability Discounts: Applied when the LLC membership interest isn’t easily sold on a public market, these discounts can range from 5–20%, reflecting the challenge of finding a buyer for the stake in the company.

Restrictions

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.

Legal Considerations for LLC Valuation

LLC valuation requires thorough review of legal elements outlined in the operating agreement and other governing documents:

  1. Transfer Restrictions: Many LLC agreements include transfer clauses to prevent unauthorized sales of membership interests. Often, majority or unanimous consent from members is required, particularly for transfers to non-family members. This helps maintain control within the original membership group.
  2. Buy-Sell Agreements: LLCs may have buy-sell agreements that outline the terms for buying out a member’s interest. These agreements can include predetermined valuation formulas or specify valuation methods in the event of a member’s exit, helping prevent disputes.
  3. Tax Implications: Tax implications of selling or transferring interests should also be considered. Consulting with a tax professional ensures that members understand their tax obligations, such as capital gains taxes on the sale of LLC interests.
  4. Dissolution Procedures: In cases where the LLC dissolves, the operating agreement should specify how assets will be valued and distributed. Each member’s interest would typically be valued according to the last known valuation method.

If you need help with how to put a value on your LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.