Ask a Trust officer

Ask a Trust officer: How to Value a Family Business

Dear Nikki:

I own a small business, and I have no interest in selling it today. But I am wondering about the value of my business, which includes real estate and buildings. If I died suddenly, would my estate owe death taxes? How can I put a price on my business, when I am not a willing seller?—FORWARD THINKER

Dear FORWARD:

For business owners, before estate planning questions and issues of succession can be addressed, an accurate valuation is needed. The higher the value of your business, the greater the tax exposure, and the more important the estate planning steps.

Business valuation is as much an art as a science. One begins with the set of fundamental factors that the IRS looks at:

the history of the business;
the current outlook for the economy and the industry segment;
book value;
the company’s earning capacity;
the company’s capacity to pay dividends;
goodwill and intangible assets;
prior sales of company stock;
sales of comparable companies.

That’s just the starting point. Valuation discounts also may apply to the transfer of interests in a small business. Discounts for lack of marketability and for having a minority interest, for example, have become routine. There may also be a discount for the loss of key employee services. IRS has experts in this area, so it is important for every business owner to rely on experts of his or her own. A business valuation must be completed with great care and without bias for it to be effective in tax litigation. As one planner was heard to comment, when it comes to arranging a professional appraisal of a business, “expensive will be cheap.”

Do you have a question concerning wealth management or trusts? Call 785-267-8402 with your inquiry.

(April 2024)