Rules
Call us at
(800) 318-7848
Like most owners of closely-held businesses, you likely have invested the majority of your wealth and life in your business. Yet, like most owners, you probably have little objective knowledge of the true market value of your ownership interest. For a multitude of business, tax, and personal financial planning reasons, it is extremely important to establish a reliable business value.
Different and sometimes conflicting goals and objectives can make valuation of a business interest very difficult. For example, if the business is being valued for the purpose of qualifying for a bank loan, the owners want the highest possible valuation to maximize their chances of approval. On the other hand, if an owner is making gifts of the business interest to children, the lowest possible valuation is preferred to minimize gift taxes. The same holds true for a buy-sell valuation where the interest is being sold to an unrelated buyer (highest value) vs. a sale to a close relative (lowest value).
Basic Rules of Valuation
Valuation is an art; it is not a science! All business interests are valued for tax purposes under IRC Sec. 2031 and Reg. Sec. 20.2031 at their Fair Market Value. Fair Market Value is hypothetical. It is defined as the amount a willing buyer would pay, and for which a willing seller would sell, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts. The IRS spells out eight factors which help the valuation experts and the IRS determine the proper value of a closely-held business.
The Revenue: Ruling 59-60, 1959-1 CB 237 factors are:
- Nature and history of the business
- Economic outlook in general
- Economic outlook of the relevant industry
- Book Value of the business
- Financial condition of the business
- Goodwill or intangible value
- Size of block to be sold
- Market price of comparable stock
In addition, there are three key points to remember when applying the above factors.
- Valuation may be based on the Asset/Liquidation value or Income/Going Concern value.
- A Majority/Control interest is worth more than a Minority/Non-Control interest.
- The value of the sum of all partial interests may not equal the value of the whole interest.
Please contact your legal and tax professionals for more information about this topic.
This is a FREE service to you.
