VALUATION OF A BUSINESS INTEREST Where the value of a closely held business is not covered by a binding, valid Buy-Sell agreement, the valuation requires that "fair market value" be determined for Federal Estate Tax purposes. Usually to be valid, the Buy-Sell should be based on a formula. The estate tax regulations define this as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts." This is covered in Regulation 20.2031-1(b). In addition to accounting for the general nature of the business, and its history of operations, Revenue Ruling 59-60 identifies these factors that should be considered when determining fair market value: 1. The company's book value - net worth (assets - liabilities). Also, does this business have goodwill and other intangible assets to consider? 2. Prospective earning capacity.
4. Economic outlook for businesses in general and for this particular industry. 5. The degree of control of the business represented by the interest to be valued. (If this represents a controlling interest, a "control premium" generally adds to the value. If a minority interest, a "minority discount" is often used). 6. The value of stocks in the same or similar line of business that are publicly traded. Consideration for the size of any prior sale of this business' stock. For estate planning purposes, when the value of a business has not been fixed, it is left open to be a negotiating point with the Internal Revenue Service. Does the IRS feel the owners' compensation is reasonable? Business valuations provide the answers. Finally, for the purpose of retirement, disability, and death, business owners should have an agreed upon formula to be used to determine the value of the interests of the business. |
