Business Valuation Services: Taxation

Business valuation support

Gifting and Estate Planning / Settlement

Succession planning and family wealth transfer are major issues for the World War II generation and their “baby boomer” children. When it is time to transfer ownership interests to loved ones, it is important to minimize the tax impact, while also addressing the emotional issues attendant to a generational transition. Careful process must be followed to manage the tax impact and reduce the possibility of successful IRS challenges. We provide thorough, comprehensive appraisal reports which determine, substantiate and defend our value conclusions.

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Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)

These legal entities allow senior family members to transfer ownership and control of business or investment assets to younger generations through a series of gifts of minority interests. Although they have been gaining favor, this estate planning alternative has come under increasing legal attack from the Internal Revenue Service.

ABA professionals have prepared hundreds of such appraisals for this and other tax-related uses and have successfully answered challenges from the IRS. Our approach to these valuations includes these steps:

  • Develop appraisal reports which properly support the value-driving decisions and the size of all discounts taken.
  • Prepare appraisals only for gifting of the FLP interest, as of the date on which gifting took place. (Valuations for different purposes, even as of the same date, can legitimately be substantially different because they have different assumptions).
  • Support the size of the appropriate discount based on a reasonable assessment of the facts and circumstances.

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Fractional Interests in Real Estate Holdings

An undivided interest in real estate is an interest in real estate held by two or more people, each of whom has an undivided interest. This interest is also referred to as a common-tenancy interest, tenants in common and fractional interest.

The fair market value (FMV) of an undivided interest is less than its pro-rata share of the value of the property because the owner of the undivided interest does not have control over the management and disposition of the property. This makes the interest less desirable to a potential buyer and consequently less marketable for the owner. This is an unusual valuation problem, and the concluded discount can be contentions. Working with specifically qualified appraisers is important for estate planning, partner buyouts, and other situations where such fractional interests are commonly found. ABA provides its members with unique training and support for this type of valuation which is not normally found in business valuation organizations.

The entire property is first valued by a real estate appraiser. ABA member appraisers are specifically qualified to integrate the real estate facts with the discount analysis to produce supportable opinions of value. Their reports integrate the real estate appraisal’s facts, and provide an unusually high level of assurance to the client.

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Charitable Contributions

The IRS requires that values of charitable donations of illiquid assets such as interests in private businesses or family investment entities be substantiated by independent, qualified appraisers. ABA professionals have prepared hundreds of such appraisals for this and other tax-related uses and have successfully answered challenges from the IRS. Our approach to these valuations includes these steps:

  • Develop appraisal reports which properly support the value-driving decisions and the size of all discounts taken.
  • Prepare appraisals as of the date on which the donation was made (valuations for different purposes, even as of the same date, can legitimately be substantially different because they have different assumptions).
  • Support the size of the appropriate discount based on a reasonable assessment of the facts and circumstances.

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Stock Options

Although the desirability of stock options has declined due to recent accounting rule changes that require expensing of option grants and slower growth in stock prices, in some cases, stock options are a useful incentive compensation vehicle. The valuation of stock options requires the application of advanced mathematical models, in which ABA professionals are well-versed.

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Machinery & Equipment Appraisals

Machinery & equipment appraisals (M&E appraisals) are specialized appraisal services conducted for a variety of purposes to substantiate equipment values. An appraisal completed by a Certified Machinery & Equipment Appraiser (CMEA) is a comprehensive and detailed report including photographs, model numbers, serial numbers, and other descriptive information. Value conclusions are based on extensive research, personal inspection, and contact with manufacturers and suppliers to determine the real worth of various machinery and equipment assets. M&E appraisals conducted by a CMEA are:

  • Certified reports
  • Follow the Uniform Standards of Professional Appraisal Practice (USPAP)
  • Meet compliance standards of financial institutions
  • Withstand the scrutiny of lenders, CPAs, courts, and others

Contact one of ABA’s Certified Machinery & Equipment Appraisers today for further details.

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Real Estate Appraisals

Although business valuation and the appraisal of real estate are frequently viewed as separate disciplines, the underlying principle for each is the same: value is the present worth of anticipated benefits.

Both business appraisers and real estate appraisers base their opinions on the income stream generated by the subject asset (except when the real estate is land only). Each discipline has its own label for the income stream. The real estate appraiser labels it “net operating income” (NOI) and the business appraiser calls it “net income before or after tax”. Both use the same approaches to value (cost, market, and income) as well as the same standard of value (market value). In real estate valuation, tangible assets, such as land and buildings, provide the basis for value.

There are two notable differences:

  1. Real estate appraisals are traditionally based on a “before debt basis”.
  2. Capitalization and discount rates for real estate valuations tend to be lower than those for business valuations.

A quality appraisal is supported by evidence found in the marketplace. The methods and standards of value employed are the same regardless of the intended use of the appraisal: marriage dissolution, financing, gifting, tax appeals, and so on. The more unique the appraisal project, the more qualified and experienced the appraiser must be. Examples of unique (special purpose) properties include: landfills, mineral rights, lakeshore, radio towers, and major shopping malls. If the real estate to be valued also includes a business owned by the same individual, the real estate appraiser and the business appraiser should work together to measure value.

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Business Appraisal Review

Appraisers who have obtained the accreditation Accredited in Appraisal Review (ABAR) from The Institute of Business Appraisers or Accredited Senior Appraiser (ASA) in Appraisal Review and Management from the American Society of Appraisers have a heightened focus on professional responsibility in their and others’ practices. They are considered “Experts’ Experts” and are able to articulate the elements of business valuation reports that credibly meet the required professional practice standards. Such appraisers are able to constructively criticize the oral and written testimony of other business valuation experts in order to help triers of fact and juries reach appropriate verdicts.

A business appraisal review comments on matters such as the appropriateness of the valuation assumptions made, methods used, conclusions reached, and compliance with professional analysis and communication standards as well as numerous other factors that speak to appraisal quality. A business appraisal review does not include an opinion of value.

ABA’s professionals can provide rebuttal testimony regarding the opinions of opposing experts and others concerning the values of business interest. This service is available on an independent (non-advocacy) basis or on a consulting (advocacy) service basis.

If you are in need of a business appraisal review, please contact one of American Business Appraisers National Network’s appraisers who are accredited in business appraisal review to discuss your situation and how we can be of assistance.

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