Equity Valuation Group provides professionally developed opinions of fair market value for use in complying with Federal estate and gift tax laws. We are guided by the applicable IRS code sections, rulings, and court decisions (including Revenue Ruling 59-60) dealing with the appraisal of all types of closely held business equities. The entire area of estate and gift tax valuations is a constantly shifting field making it all the more critical to have EVG address your valuation needs in the areas of:

• estate tax related business valuations
• gifting of closely held stock and partnership/LLC interests
• family limited partnership and limited liability company valuations
• buy-sell and shareholder agreements
• business valuation for life insurance planning and funding
• stock options held by estates
• restricted public stock held by estates
• conversion of C-corporation to subchapter-S corporation status

Family Limited Partnerships (FLPs) and other types of family controlled holding companies have been a popular estate planning tool for years. Aside from the business purposes of such entities, such as centralized management and protection of assets from creditor claims, they also may offer tax advantages through valuation discounts.

The valuation of FLPs and similar interests typically requires the application of discounts from pro rata value for lack of control and marketability. These discounts are derived from actual market evidence but must also be supported by the facts and circumstances unique to every partnership. The resulting fair market value can be very useful in transferring ownership from one generation to the next with the least tax impact.

An ESOP is a Qualified Plan under the Employees Retirement Income Security Act of 1974 (ERISA) which can be used to achieve a broad variety of different results. In addition to being a useful vehicle in aligning the interests of employees with those of the business’ owners, it can be used to attain owners’ goals in business succession planning, diversification of owners’ assets, estate planning, property settlements in divorce, or as an exit strategy. In many situations, substantial tax benefits can result from the use of an ESOP, including the deferral of gain recognition on the sale of stock. Studies show that ESOPs engender less turnover and increase:

• Employees’ Motivation & Innovation
• Company’s Profitability
• Return on Investment
• Tax Benefits
• Wealth to Beneficiaries

Valuations of companies for ESOP purposes require special considerations not present in the valuation of non-ESOP companies. In addition to possessing the skills and knowledge to perform the valuation, the appraiser must also be knowledgeable of ERISA and its related regulations.

Section 409A of the Internal Revenue Code is targeted at nonqualified deferred compensation plans. The section became final on January 1, 2009. Nonqualified common stock options and some other types of nonqualified deferred compensation are subject to Section 409A requirements. Essentially, the code requires private companies to grant stock options at “fair market value”.

Deferred compensation amounts under these plans are subject to inclusion in a recipient’s gross income unless the plan meets the section’s specified election and distribution requirement. One of the key exclusions is when the exercise price of nonqualified stock options is equal to or greater than the fair market value of the underlying stock as of the date of the option grant. This exclusion requirement dictates that the IRS provides guidance as to how private companies can establish the fair market value of their stock consistent with this Section 409A exclusion. The IRS will accept a valuation of private company common stock, if done by “the reasonable application of any reasonable valuation method.” These include:

1. The fair market value of tangible and intangible assets of the corporation;
2. The present value of future cash-flows; and
3. The market value of stock or equity interests in comparable companies.

The valuation may include other relevant factors, such as control premiums or discounts for lack of marketability, which is consistent with the standards laid out in IRS Revenue Ruling 59-60 regarding valuation of private companies. An independent appraisal is your highest assurance for the IRS to presume the fair market value conclusion is reasonable. Our analysts have extensive experience valuing private companies and allocating that value across common, preferred, and other equity instruments using the latest valuation techniques.

Business valuations are often needed for firms whose partners or shareholders require a valuation for the purpose of understanding the value of the business, and/or a specific shareholder interest. Such valuations are often especially useful in 50/50 partner situations where the partners are deadlocked and neither partner has control over major company decisions.

Several factors can drive major assumptions used in these valuations including: applicability of control and marketability discounts under fair market value, buy-sell agreements, operating agreements, and legal statutes regarding fair value of a business that vary from state to state.

Frequently, shareholder buy-outs are addressed in a company’s operating agreement or in a separate buy-sell agreement. Too often, though, the specific provisions of the agreement that pertain to how the purchase price is set are vague. Formulas are subject to interpretation and are often too narrow to cover all relevant valuation methods and considerations. We recommend that your agreement provide for a credentialed appraiser to quantify the buy-sell price, because an independent, qualified party can consider all the relevant factors that go into determining an appropriate price.

If you already have an agreement, or are in the process of drafting one, review the exact wording pertaining to price. Most agreements have language that is non-specific and difficult to interpret. Appraisal language is specific, and certain words mean certain things. For instance, fair market value frequently includes consideration of discounts for lack of control and lack of marketability. What this means to a minority shareholder is that the value of the ownership interest in the company will be discounted from the pro rata value of the entire business. If that is not the intent, it should be specific in the agreement.