Professional business valuation is most relevant to private businesses – small business, micro-cap and mid-cap business without a public stock listing. These firms may be owned by individuals, trusts, estates and private equity partnerships. Being an illiquid asset, determination of a business’ value is determined by interpreting the market rates of return for an investor, the equity/debt structure and how this applies to the beneft stream that accrues to ownership. When downstream matters can involve disputes between shareholders and federal tax liability, it is important to eliminate unnecessary risk by using advanced appraisal practices. It is rare to find an outside investor in a private company that has any idea of equity value of their interest and how it changes to due market factors and the activities of management.
In a definitive letter written by the IRS in 2008 they said, “In all ROBS arrangements, an aspiring entrepreneur creates capital stock for the purpose of exchanging it for tax-deferred accumulation assets. The value of the stock is set as the value of the available assets. An appraisal may be created to substantiate this value, but it is often devoid of supportive analysis. We find this may create a prohibited transaction, depending on true enterprise value.”
AVM’s valuations meet IRS requirements for supporting ROBS transactions. Low cost valuations are a risk to the corporation which can result in fines of 100% of the transferred funds, plus a 15% penalty under ERISA law.
Executing an ESOP plan is a savvy exit strategy for the business owner(s) that wants to liquidate all or part of his investment. A minimum 30% of the company equity must be transitioned to the ESOP, and if an owner maintains 51% of company shares, they can remain in full operational control.
The first step is for AVM to prepare a feasibility study which provides a road map on how to manage the ESOP in future years and view the long term effects of implementation. Once established, AVM works with the Trustees and ESOP Committee to provide ongoing stock valuation per regulatory requirements so that the trustee has values to supply each shareholder for their annual statement.
On a periodic basis, AVM supplies ESOP trustees with needed studies for ESOP redemptions to ensure adequate liquidity by the plan based upon vesting, eligibility, death, termination, retirement, diversification and retirement payouts are projected for their cash flow effect.
Trusts are created for estate planning purposes, and assets placed in these trusts must be appraised from time to time. In some cases, private company stock must be valued annually via independent appraisal.
A trustee has a fiduciary duty to its beneficiaries which may require formal valuation when distributions need to be based on current value. Business ownership interests, real estate interests, charitable donations and other types of security interests require valuation when a transfer occurs.
Minority interests in assets may be discounted to fair market value for their lack of control and lack of marketability. The gifting or transfer of minority interests allows value to be reduced from the control interest. These discounts can be used as key strategies for gifting, establishing an estate plan or negotiating a buy-out of shares.
AVM’s discount protocol meets Revenue Ruling 59-60 requirements and it’s report format follows the Tax Court’s continued guidance to “State Your Case’ when determining minority interest discounts.
The valuation of real estate partner interests and family limited partnership interests varies somewhat in case law and analysis technique from business valuation. Defined formula clauses, tenants-in-common, joint tenancy and other variations come into play. AVM has valuation models and the right data sources to accurately define the arguments needed to create defensible opinions of value for these interests.