Business Attorneys

Estate Planning In Depth: Business Valuation

Whenever we own or manage interests in a closely held business, we usually need to think about a business valuation at one point or another. The need or desire for a business valuation can arise in a number of different ways. We may be looking to gift some business stock during our lifetime, manage a business inheritance as part of a probate or trust administration, or perhaps sell our business to a strategic buyer.  In all of these scenarios, we are likely to know or hear that a business valuation would be a good idea. But why? And how?

What is a Closely Held Business?

A closely held business is generally any business with relatively few owners, whose stock is never (or almost never) publicly traded.  Within that broad definition, closely held businesses can take many shapes and sizes. The main uniting feature of closely held businesses is that there is no public market that can allow us to check the business share price on any given day.  

Why Get a Business Valuation?

As background, for estate planning clients, the difference between ordering and not ordering a business valuation may mean the difference between paying or not paying significant estate taxes at our death.  Oregon’s estate tax applies to all gross estates of $1 million and above. Separately and in addition, the federal estate tax applies to all gross estates of $11.2 million and above for individuals, or $22.4 million for couples.  

Now, let’s imagine an electrician who starts an electrical company from scratch, and continuously re-invests profits into the business.  At time of death, this business owner receives an annual salary of $80,000, and has little in the way of cash savings.  The owner’s daughter and son inherit the electrical company, and learn from an estate-tax appraisal that the business was worth $2 million, and their father’s estate owes more than $100,000 in estate taxes.  At this point, the siblings consider their options, and decide to sell the business quickly to the highest bidder to come up with the funds required to pay Oregon’s estate tax. The siblings are relieved that they were able to sell the business, but now worry that the new business owner is free to terminate the siblings’ employment with the company.  Things do not have to go this way.

With a periodic business valuation during the lifespan of our business, we can better plan to handle the tax consequences of business growth.  The shares of our business can be gradually gifted to our children, so that future appreciation in business value is not counted for purposes of our estate tax bill.  At the same time, keeping tabs on business value can help us spot opportunities to sell the business to a key employee or a competitor, and re-invest the fruits of our labor into a more diversified set of assets.

First Steps to Ordering a Business Valuation

When ordering a business appraisal, the following issues should be clearly discussed and agreed with your business appraiser:  

  1. The purpose of the valuation (e.g., estate tax, or sale);
  2. The scope of the valuation (e.g., a calculation of value, a limited appraisal, or a full appraisal); and
  3. The nature of the deliverable (e.g., a summary report, or a full report).  

If you suspect that you or someone you know needs a business valuation, we would be happy to make some introductions.  We look forward to helping you with this process as part of our comprehensive approach to your estate planning and business needs.