SUCCESSION & TAX PLANNING

A closely-held business is often the most valuable asset contributing to the net worth of a business owner. A fair market value appraisal can be a critical first step in transitioning a business to the next generation, selling to an ESOP, or contemplating the sale of a company. Summarized below are just a few of the common reasons for business appraisal services used in corporate succession and tax planning.

Estate Planning

There are many estate planning tools that involve a sale, gift, or contribution of an equity interest in a closely-held business. The Internal Revenue Service requires a fair market determination for these transactions. Upon death, a taxpayer’s estate may include closely-held stock or other illiquid securities, which also requires a fair market value determination for Federal Estate Tax purposes.  At FairValue Advisors^TM, our appraisals are specifically designed to comply with IRS valuation guidelines described in Revenue Ruling 59-60 and the Adequate Disclosure Rules.

Buy-Sell Agreements & Buy-outs

Buy-sell agreements can be used as a succession planning tool that provides an exit strategy for owners and business continuity. Agreements that use predetermined formulas to establish a transaction price are rarely a reasonable proxy for fair market value, since business and industry conditions can change over time. In addition, formulas used in buy-sell agreements may not be accepted by the IRS as indicative of fair market value. It is becoming more common for buy-sell agreements to stipulate that transactions must occur at fair market value. Other agreements with investors and creditors may involve “triggering” events that also require a fair market value estimate. Our appraisals are used to assist with the buy-out pricing, as well as the potential obligations resulting from buy-out clauses and triggering events.

ESOPs

An Employee Stock Ownership Plan (ESOP) may provide a favorable vehicle for selling a business to its employees. Since the value of ESOP shares is based on the performance of the Company, an ESOP can provide employees with the opportunity to share in the future performance of the business. An ESOP can provide the seller with liquidity and diversification, while in many cases still maintaining control of the business. Depending on the structure of the ESOP transaction, the seller may gain favorable tax treatment on the proceeds from the sale of the stock and the ESOP Company may enjoy the tax deductibility of principle payments. Since an ESOP can pay no more than adequate consideration for the Company’s stock, the Department of Labor and the Internal Revenue Service require an appraisal of the ESOP shares for the initial ESOP transaction and at least annually. FairValue Advisors’ ESOP appraisals are specifically designed to comply with DOL and IRS requirements.

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