Business Valuation

Appraisals of businesses or other property may be needed for estate planning purposes, such as in determining the probable amount of estate or gift taxes as an aid in planning prior to the death of a business owner. In the case of the estate of a deceased person, a valuation of a business, business interest, or other property owned by the estate is frequently necessary in connection with the preparation and filing of an estate tax return.

In 2013, the American Taxpayer Relief Act of 2012 was enacted, providing for a federal exemption of $5,000,000. Adjusted for inflation, the exemption is $5,450,000 in 2016. Adequate disclosure rules require that a gift be reported and meet certain requirements in order to start the statute of limitations of three years, otherwise the IRS may revalue the gift at any time in the future. The submission of an appraisal will meet the adequate disclosure requirements with respect to the valuation of any gift transfer if the appraisal meets the requirements of Internal Revenue Code Section 301.6501(c)-1(f)(3).

SPM&Co has extensive experience assisting business owners, families, estate planning attorneys, and wealth managers plan and document the transition of ownership in privately held companies and partnerships. We closely follow IRS challenges in Tax Court and routinely present to attorneys and business owners on developments and implications of Tax Court decisions. We are well-versed in discounts for lack of control, lack of marketability and built in gains and regularly discuss and advise on the implications for discounts in Family Limited Partnership and Limited Liability Company agreements.

Our capabilities include valuations for purposes of:

• Gift tax compliance (IRS Form 709)
• Estate tax compliance (IRS Form 706)
• State estate tax compliance (e.g., Form M-706 in Massachusetts, Form ET-706 in New York, From RI-100A in Rhode Island, and Form 706ME in Maine)
• Non-cash charitable contributions
• Estate planning

We perform valuations of:

• Common stock, preferred stock and debt
• Family limited partnership (FLP) interests
• Limited liability companies (LLC) interests

Historically, the majority of valuations attached to U.S. federal gift tax returns were prepared in the context of donors gifting to non-tax-exempt recipients, such as family members. With the rise of donations of complex assets, such as closely held company stock, restricted stock, limited partnership interests and limited liability company interests, valuation analysts are more frequently asked to value such assets for charitable contribution purposes. The extent that the value of the contributed asset meets certain dollar thresholds, the valuation is required to be attached to the donor’s U.S. federal income tax returns. In the case of contributions of property for which a deduction of more than $5,000 is claimed, disclosure requirements are met if a qualified appraisal is obtained for such property. If contributions of property for which a deduction of more than $500,000 is claimed, disclosure requirements are met if the individual, partnership or corporation attaches to the return for the taxable year in which such contribution is made a qualified appraisal of such property. Further, the IRC broadly defines a qualified appraisal as “an appraisal that: (i) conforms to the regulations or other guidance prescribed by the Secretary and (ii) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards.” SPM&Co prepares appraisals in accordance with generally accepted appraisal standards as our appraisals our consistent with the substance and principles of the AICPA SSVS No1 and the NACVA Professional Principals.

SPM&Co has extensive experience assisting business owners, families, estate planning attorneys and wealth managers plan and document the donation of minority ownership interests in privately held companies and partnerships.

A Subchapter C corporation can elect, under certain conditions, to become a Subchapter S corporation. One of the tax-related motivations for this decision rests upon the “built-in gains” taxed on the eventual sale of the company. Under IRC Section 1374, a corporation making an S corporation election must obtain a valuation to determine the built-in gain – the appreciation in asset value from the period of time when the entity was a C corporation – as of the date of the S corporation. C corporations that convert to Subchapter S status require asset valuations to set a limit, in the event that a built-in gains tax is triggered. This is because, if the S corporation subsequently sells any of these assets within the 5-year time period after its conversion from a C corporation (the recognition period), a built-in gain may be realized. This translates to the company being liable to pay the highest corporate level tax rate on the gain as if it were a C corporation within the 10-year waiting period subsequent to the election. The valuation provides a cap on the built-in gain tax.

SPM&Co has worked with numerous accounting firms in providing valuations for their clients, upon a Company’s conversion to an S Corporation.

It may be necessary to determine the value of various kinds of property owned by one or the other party, or by the two of them together, in order to provide for division of property in connection with a marital divorce or a shareholder/partnership dissolution. A valuation of the business or business interests owned by one party usually will be required in order to determine the price that the party acquiring full title is to pay to the other. We have valued the following in connection with marital dissolutions:

• Closely-held businesses
• Professional practices
• Personal goodwill
• Stock options, notes, and other investment assets

SPM&Co’s valuation experience across many industries provides our team with the business understanding that allows us to determine the value of a business for dissolving a partnership/corporation, shareholder buyouts, and dissenting shareholder actions. We offer consulting services as well as testifying experts to suit your needs.

Harvesting the wealth created in a private company can be one of the most daunting tasks an entrepreneur will face in their lifetime. All business owners have unique circumstances that impact the process through which they will exit their business. SPM&Co has extensive experience in helping business owners achieve successful exits.

There are four areas that need to be considered to develop a plan and realize a successful exit:

1. The first area consists of addressing strategic business issues that recognize the existing position of the business and processes that will be required for a successful transition. This stage often involves assessing the state of the business, dependence on key customers and management, and industry conditions.
2. The second area revolves around assessing the owner’s financial situation particularly as it relates to reliance on income from the business as well as the overall diversification of the owner’s wealth. Often times, a business is an owner’s largest asset and primary source of income. Coincidentally, a privately held business is often the owners most risky and illiquid investment.
3. The third area entails the professional or career goals of the owner. Some owners may relish in full retirement while others may wish to remain active participants in the business they built. Business owners may underestimate the value of their work as well as what work they find most enjoyable and meaningful.
4. The fourth area consists of personal issues specific to each individual business owner. These issues range of the owner’s age and health conditions to the owner’s desire to transfer control to younger generations, long-time employees, or third-parties.

SPM&Co can assist with assessing the business, determining a valuation and highlighting changes that may result in increases in value. Once a buyer is identified, we can help to assess deal offers and assist with offer negotiations if no intermediary is retained.

Determining when and how to smoothly transition ownership in a company to family or employees is vital to the continued success of the business and retention of wealth created by the business.

SPM&Co works closely with clients and their advisors to make the process of transition as effortless as possible. We assist with planning and valuations for the following transition mechanisms:

• Transitioning through gifting shares and gift tax compliance
• Determination of values for sale of stock to family or employees

Companies need to make strategic decisions on an ongoing basis. Choices such as whether to purchase a competitor, spin off a portion of a business, or even whether to add a product line can be daunting. SPM&Co can help with the steps necessary to make important discussions, including:

• Develop an accurate understanding of the Company’s current position
• Determine a future vision
• Test the potential financial impacts of different courses of action
• Prioritize and decide on the best strategy for the Company as it currently stands
• Monitor progress and effects on value of the business

SPM&Co is a valuation practice with experience working with clients in:

• Strategic due diligence – in any transaction, sellers and buyers have their own respective motivations. SPM&Co’s experience in other practice areas provides us with a unique ability to evaluate and understand the entire spectrum of a business’ value to parties on both sides the transaction.
• Offer negotiation –we believe that understanding the drivers of value in your company is critical to understanding offers and we can provide you with the resources and perspective to negotiate your value effectively.
• Acquisition screening
• Divestitures

SPM&Co provides independent, experienced, and in-depth analysis to determine the fairness of potential M&A transactions involving private entities. Fairness opinions may be used by a company’s board of directors, special committee, buyers, sellers, trustees and investors to determine the fairness of proposed consideration for a transaction.

The primary critique of most fairness opinions is the lack of independence. A clear conflict arises when the opinion is rendered by the investment bank whose fee is contingent on the deal closing. SPM&Co’s position as valuation experts being paid only a fee for service, rather than investment bankers, allows for true independence and impartial, unbiased opinions. Our expertise and experience in valuing companies across industries and sizes allow us to provide high quality, unbiased opinions.

In a buy-sell agreement, where the shareholders or corporation agree to purchase the shares of a deceased or disabled shareholder (i.e., management succession) for a stipulated price, a professional appraisal is the best way of independently determining that price. Buy-sell agreements typically either specify the actual price at which the ownership interest is to change hands given the specified circumstances, or specify the procedure by which a price is to be determined. To combat the perception that buy-sell agreements are value-fixing techniques, the IRS has tightened the rules so that a buy-sell is judged null and void unless it meets three tests: (1) the agreement must be bona fide, (2) the agreement is not a device to transfer property to family members at less than fair market value, and (3) per IRC 2703(b)(3), the terms of a buy-sell entered into after October 8, 1990 must be “comparable to similar arrangements entered into by persons in an arm’s-length transaction.” Typically, only an experienced business appraiser will have the experience and comparable transaction data to satisfy the intent of the IRS in this test.

Further, SPM&Co can consult with attorneys in the drafting phase of a buy-sell agreement. It is imperative that all parties are aware, and more importantly, take action, in executing a buy-sell agreement with care and diligence to ensure a successful buyout, upon a triggering event. As valuation professionals, we have unfortunately experienced, first-hand, the life-altering ramifications of poorly crafted agreements – with all of the intended and unintended consequences of the language incorporated in these agreements. Given this experience, we can address these issues up front. However, should we work with an older buy-sell agreement with onerous language, SPM&Co has the experience to understand the ramifications and how to handle the many scenarios that may be of interest to the IRS or to the various parties subject to the buy-sell agreement.

SPM&Co has the experience, qualifications, certifications, and resources to tackle the nearly any appraisal review engagement. We provide reviews for:

• Litigation – We provide second opinions, reviews, or critiques on a client’s expert report or reviews of opposing side’s expert report in many litigation matters, often on a consulting basis for attorneys.

SPM&Co has the expertise to evaluate the work of our peers to assess the credibility of their opinions. Although the review process varies greatly depending on the engagement, we most frequently consider the following factors in assessing the work of others:

• Methodologies – the reliance upon (or the omission of) certain methodologies can have a significant impact on the range of values considered by an appraiser.
• Relevance and Reliability – the valuation of privately held business requires a large degree of subjectivity as well as analysis. We can perform the due diligence to confirm that the assumptions relied upon have a reasonable basis as well as support the conclusion of value.
• Standards and Disclosures – a valuation report that either fails to meet the appraisal standards or one that lacks adequate disclosures and transparency is highly vulnerable to critique in a litigious or tax-related situation.