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For What It’s Worth: Legitimately Different Values – March 2017

Privately held businesses have no active markets for their ownership interests, so their values cannot be easily determined (If they could, I would be in another line of work!). The absence of active markets implies that:

  1. Business appraisals have to identify the appropriate market for a business (interest).
  2. That, in turn, depends on the owner’s goal for its disposition such as (this is not a complete list of possibilities):
    1. Selling it to a third party
    2. Selling it to the company or another owner
    3. Selling or gifting it to a family member
  3. It also depends on the rights of and restrictions on interest ownership:
    1. Third-party sales might be limited by a right of first refusal
    2. Sales to the company or another owner might be governed by a buy-sell agreement
    3. Sales or gifts to family members could be taxable events

This boils down to a simple fact: business interests can have LEGITIMATELY different values depending on the relevant markets, the owner’s goal, and applicable rights and restrictions.

For example, a business sold to a “strategic buyer” with a business fit might have a high value, a so-called “premium,” while a sale or gift of a minority interest to a family member might have a low value (due to valuation discounts for lack of control and marketability).

This is often a point of confusion for clients, who often think that the only value of an interest is “what someone will pay for it.” Generally, that is true but it depends on who that “someone” is (see points 3 – 1, 2, and 3).

Each example in point 3 implies a different “standard of value,” a definition of the relevant market, for the interest. In most cases, the owner’s goal dictates the standard of value. For example, a sale or gift to a family member implies the fair market value standard (applicable to tax situations).

In some cases, however, the standard of value is not clear-cut. In a recent case, we valued a business that was part of a large estate in order to allocate all of the assets on an equitable basis among the heirs, some of whom were working in the business and some of whom were not. The parents and children wanted to arrive at an allocation that gave each child assets of equal value, with the children working in the business receiving its stock and the other children receiving other assets.

With guidance from us, they agreed (and defined) “equity” to mean that business interests would be valued at fair market value WITHOUT discounts for lack of control and marketability. For estate and gift tax purposes, however, minority interests would bear appropriate valuation discounts. Note, that the family had discretion over defining what “equitable” (one standard of value) meant, while for tax purposes they (of course) complied with the law. Here, business interests had two legitimately different values, one for equitable allocation purposes, and another for tax purposes.

We would also note that the appraisal we did for allocating the assets (without discounts) was only for family members (not for the IRS: it had no relevance to the taxable estate). The appraisals for transfers of minority interests (and, eventually, the one for the estate at death), were filed with the appropriate tax returns.

This was a classic case of multiple legitimate standards of value. If you or your clients would like to discuss others, please do not hesitate to call us.

About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations. For more information, visit or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please or call (216) 589-0900.

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