Built-in capital gains tax can be a real drag
Capital gains tax obligations can significantly affect value, especially for an established holding company with low cost basis. Even if a sale isn’t imminent, investors consider tax obligations when buying and selling business interests. This article notes that courts increasingly embrace valuation discounts for built-in capital gains tax, using a case study to illustrate the point that it’s not so much whether capital gains tax affects value but how to quantify the discount. Because the IRS and the Tax Court haven’t agreed on the proper method for quantifying the discount, it’s even more important that the discount be well supported by facts and legal precedent.

Case Citations:
Estate of Litchfield v. Commissioner, T.C. Memo 2009-21, January 29, 2009.
Estate of Dunn v. Commissioner, 301 F.3d. 339, 5th Cir., 2002; Estate of Jelke v. Commissioner, U.S. Court of Appeals for the 11th Circuit, No. 05-15549, November 15, 2007.
Estate of Davis v. Commissioner, 110 T.C. 530, 1998.

Knowing value is half the battle
While baby boomers nationwide are considering selling their businesses in preparation for retirement, a majority of them haven’t had their businesses appraised by a valuation professional within the last year. This article looks at a business’s value drivers — and value drainers — listing several key factors investors look for when valuing a business interest, including profits and cash flow, competent asset management and reinvestment in research and development. The article explains that an objective valuator can help business owners find ways to minimize risks and maximize selling price when it’s time to retire.

One price doesn’t fit all
Making sense of valuation discounts
Valuation is based on the specific facts and circumstances of a situation. If the controlling interest and all the minority interests are valued separately, they may add up to more or less than what could be received if the company were sold as a whole. This article discusses the types of valuation discounts that may affect value, including minority interest and lack of marketability discounts. It explains the importance of the degree of control represented by a block of stock and uses a hypothetical case study to illustrate the way discounts actually work in the real world. The article points out that a qualified appraiser can find well-supported discounts that will withstand IRS scrutiny.

SBA tightens business acquisition lending requirements
This brief article summarizes a recent SBA move to rein in lenient lending practices to small businesses: SBA Standard Operating Procedure (SOP) 50 10 5(A). The new requirement calls on business acquisition loan applicants to submit an independent business appraisal for all loans greater than $250,000 (excluding the appraised value of real estate and equipment). The article explains that the SBA defines a “qualified source” for the independent appraisal as someone who regularly receives compensation for business valuation. It also notes the controversy resulting from restrictions the SBA has placed on loans based on a company’s goodwill.