income

Should You Skip a Valuation for an Estate?

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Here’s the scenario. One of your parents dies and they own a business. Should you value the business for their estate? Maybe. I want to lay out the case for giving this a closer look.

Family Disputes

I’ve worked with a lot of executors and trustees, and I’ve seen these:

  • The business is usually one of many assets.
  • The business is often the most difficult asset to value.
  • The business may be the most valuable asset in the estate or it might be worth nothing. 
  • The more beneficiaries, the more likely there will be conflicts.
  • If the business isn’t valued by a professional, someone will guess the value.
  • Guesses lead to fights and mistakes that cost time and money.

A good business appraiser should put value disputes to rest. It will also help you correctly allocate and distribute assets consistent with your family member’s will or trust.

Estate and Income Taxes

While it’s common today for many estates to be under the Federal estate tax exemption and not be required to file a Form 706, state estate or inheritance tax can be another story. You cannot accurately make Federal or state estate tax determinations if you don’t have values for all the assets and liabilities, including the business. The risk from unpaid estate taxes, interest, and penalties usually extends to the beneficiaries indefinitely. That means your personal assets are at risk if the proper filings and payments aren’t made.

Whether the business is retained or sold, income taxes after death are often computed based on the value of the business at death. Stated another way, without a business valuation, you will often be unable to estimate anyone’s tax basis in the business on the date of death. This can become particularly complex if the business is retained by multiple beneficiaries after death. A surviving spouse and children who continue to own the business usually add more complexity.

Parting Thoughts

Hiring a qualified business appraiser will cost money, but it’s important to consider your risks of not hiring one. Consult an attorney and a business appraiser, both with significant business estate experience. This meeting should be conducted with both professionals. After meeting and reviewing documents, they can recommend how to proceed. By the way, it’s a great idea to have these meetings before your business-owning family member passes away. Your family member can then update estate documents to match their wishes before it’s too late.  

Josh Horn, CPA, CVA
Horn Valuation

Sign up for this blog here if you’re interested in business valuation for family business succession and dispute settlement. My clients are business owners and attorneys. You can email me at [email protected] and connect with me here on LinkedIn, Facebook, Twitter, YouTube and Instagram.

“Once-in-a-lifetime events demand an expert.”

Not Knowing This Will Cost You Big Time

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big time

Recently, I’ve run into some situations where someone was trying to value a business by cobbling the assets together as the only method.  This is Part 1 of a series addressing goodwill in a business.  

Picture a business as a plain old plastic bucket.  And into that bucket, we’re going to pour things like industry expertise, a talented workforce, and maybe some patents or trade secrets.  Then, we’re going to take our “business bucket” and go out into the world and start “watering seeds” and watching the business grow.  Can you see the stuff we put in our bucket?  No, you can’t see it.  Is the bucket much more valuable than the empty piece of plastic we started with?  You bet.  And that’s what goodwill is.  It’s that “invisible stuff” that is not recorded on the business’ books and records but drives a good portion of the business’ value.

Why is this important when valuing a business?

  • A business can easily represent over 90% of a family’s net worth.
  • Unless the business is worth more “dead than alive”, if you value it using only the visible assets, you’ve valued the empty bucket.  You’ve massively undervalued the business and forgot about goodwill.  (Identify)

Why is this important in a family law (divorce) setting when a business is an asset?

  • If the business has goodwill, you may be required to determine how much there is to meet the standards of your jurisdiction. (Quantify)
  • You may then need to split the goodwill into enterprise and personal pieces. Why?  Because enterprise goodwill is marital property and personal goodwill is not marital property in states such as Illinois where I live.  (Allocate)

Business valuation skills and judgement are essential to identify, quantify, and allocate goodwill.  Not knowing how to handle goodwill will cost you big time.

If you’d like to see this concept above on video:  https://goo.gl/y2Q6qA
If you’d like to see a video of how to quantify goodwill:  https://goo.gl/aUds5k
If you’d like to see a video of personal goodwill factors:  https://goo.gl/VhRKVz

Or email me at [email protected] and I’ll send you all 3 video links in secure and downloadable format.  Let me know if you want to talk about goodwill in business valuation or family law.

Call me if you would like to discuss valuing a business in divorce or litigation.

Thanks,
Joshua L. Horn, CPA, CVA
Horn Valuation
Phone: 217-649-8794
Email: [email protected]
Website: hornvaluation.com
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Horn Valuation is for attorneys,  judges, and business owners who believe there’s an easier way to settle business disputes and want to work with a valuation expert using fixed fees. I’ve been a CPA since 1999, a certified valuation analyst since 2008, and valued mom and pops to multi-million-dollar businesses. Call me today if you’re interested in working together on a valuation solution.