Advisors Press Business-Owner Clients To Update Valuations

August 27, 2010 • Page 2 of 2

Owners often have buy-sell agreements with partners in case one dies, and if such a pact values the business too highly, it can leave survivors with too high a bill to pay. That could even wind up requiring the whole business to be sold.

One silver lining to a lower valuation is the impact on taxes, particularly when passing a business on to heirs. Estate taxes are expected to rise next year and new restrictions on use of trusts could also be coming soon. "Because values are so low and interest rates are so low, there's never been a better time to move assets to the next generation," says Parrish.

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1 Comment

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13 years ago

CPA/ABV, CVA

Any advisor who thinks a valuation that costs $750 to $1200, whether formal or informal, can be used as the basis for any type of planning is kidding himself and doing his client a great disservice. If using a valuation for estate or gift planning purposes, you should engage someone who will at least put in as much analysis and research time as the IRS is going to do when it comes exam time. If a valuation is done merely by entering a set of financial statements into valuation software, which is all that can be done in the 2 to 5 hours implied by a $750 to $1200 fee, how much analysis can be done? None. Will the valuer do an in depth analysis and project future cash flows? Will there be substantive discussions with management? Will there be industry research and a thorough search for comparable sales? We regularly see bargain basement valuations based on cash basis tax returns without recognizing that the result could be totally wrong. Will the valuer have time to research proper officer compensation to adjust for actual comp that was set for tax saving purposes but may be totally inappropriate for valuation?Picking minority discount rates out of the air is no longer acceptable by the tax court, but is still done by those too uninformed to realize it is wrong.If your client has enough assets to be require planning, the business that is the basis of that value is worth the cost of a serious professional valuation. The business valuation process will often produce operating, financial and tax planning ideas that are worth far more than the cost of the 40 hours and up needed to do it right. If you are attaching the valuation to an Estate or Gift tax return, presentation of a shortcut improperly documented valuation will buy you an audit that may be far more costly than having done it right.Donald J. SchafferCPA/ABV, CVANorthbrook, IL

Advisors Press Business-Owner Clients To Update Valuations

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