Valuation of Your Business for Tax Planning

Few business owners relish spending money on something they don’t need. And for most owners, hiring an expert to estimate the value of their companies falls into that don’t-need category.

So it is no surprise that owners typically respond to an exit planning advisor’s recommendation to get an estimate of value for the company with some variation of: “Now? But I’m not planning to leave for years!” or “I built this company so I—better than any so-called expert—know what it is worth!”

Before you join these owners and scratch “Business Valuation” from your list, consider just five reasons you should put “Estimate of Value” at the top of your list. An estimate of value:

1. Establishes your starting line and distance to the finish.
2. Tests your exit objectives.
3. Provides important tax information.
4. Gives you a critical litmus test.
5. Provides owners (and employees) an objective basis for incentive plans.

If you still are not sure that your list requires rearranging, rest assured that an estimate of value:

• Is not the full-blown opinion of value that you will need just prior to your transfer of ownership;
• Costs about half as much as a standard opinion of value (because it lacks the supporting information contained in a standard opinion of value);
• Is the basis for the (later and) complete valuation; and
• Is used for planning purposes only. It cannot be relied upon for tax or other purposes.

As you consider various exit paths (sale to third party or transfer to insiders) understand that each path has different tax implications. Without appropriate tax planning, taxes can take a huge bite out of your sale proceeds. Given that tax mitigation strategies often take years to implement, it is critical that you start planning well before you exit and that you use an accurate estimate of value.

For example, in a transfer to key employees, a common transfer technique (designed to reduce both owner’s and buyer’s tax liabilities) is to initially transfer a minority interest at a discounted value. Using a “rule of thumb” valuation to support a minority discount simply will not fly when the IRS asks you to justify the discount. You must depend on the valuation of an independent valuation specialist who is able and willing, to defend the valuation before the IRS.

Author: Ronald Oddo is a Certified Exit Planner with more than 28 years of experience preparing business owners for the day they will exit from their business. I am qualified to provide this needed service to business owners based on my education, experience, knowledge and skills. I have earned and maintain nine business related certifications and six security licenses. In addition, I am a Federally Licensed Tax Practitioner with the privilege of representing troubled taxpayers before the IRS. To stay as current as possible I enjoy membership in 17 professional associations. On a day-to-day basis I manage a fully staffed tax, accounting and financial planning practice which provides all of the resources for our Exit Planning Clients.