Death and divorce: Valuation considerations

April 23, 2019

This paid piece is sponsored by Eide Bailly LLP.

By Jay Fullerton, J.D., CVA, valuation manager

Major events like death and divorce often have significant disruptive effects on life. Uncertainty regarding the future can cause stress levels to increase and make already unpleasant times even worse. The impact of those events is even larger when a business organization is a piece of the puzzle. Decisions regarding management, ownership and taxes will need to be made. A business valuation can be a useful tool to help remove some uncertainly and aid in making those decisions.

Valuation considerations for estates

There are frequently tax implications when ownership of a closely held business is part of the estate of someone who has recently passed away. Is the estate large enough to trigger estate tax? If yes, then a business valuation may be able to help lower that tax bill by use of discounts for lack of control and/or lack of marketability. These discounts can have a substantial effect on the conclusion of value for those investments. For example, because of the lack of ability to control business decisions, a 10 percent ownership interest in a company that has a total value of $1 million does not translate to a value of $100,000. A reduction in value is necessary to account for that lack of control. Discounts for lack of control often range from 10 percent to 20 percent.

A discount for lack of marketability also may be appropriate. This discount accounts for the fact that there is no quick and easy way for an owner of a closely held company to cash out his or her investment. Unlike shares in Apple or Wells Fargo, which can be converted to cash in a matter of days, there often is no ready market for a closely held investment. Finding a buyer potentially could take months or even years. A lack-of-marketability discount is a reduction in value to account for this lack of ability to quickly liquidate the investment. Depending on the specifics of the situation, lack-of-marketability discounts can be as low as 5 percent to 15 percent or as high as 30 percent to 35 percent.

A business valuation also can help establish the new tax basis for those who inherit the ownership interest. These new owners receive a “step-up” in basis. The tax basis for the new owners will be what the value was on the date of death, not what mom or dad’s basis was going way back to the 1960s or 1970s. This can help reduce future capital gains taxes if and when the interest is later sold.

Having an independent party value the business also can help maintain family harmony during a difficult time. Disputes among family members about how assets get distributed are not uncommon. A business valuation can help establish that those who are inheriting the family business are not receiving more or less than those who are inheriting other assets.

Valuation considerations for divorce

In the realm of business ownership, divorce can have two meanings – personal or business. Valuations prepared for marital dissolutions provide an independent source to aid in the property-division arrangement. This can help to resolve disputes over what is often one of the largest marital assets. A valuation professional also can determine issues surrounding goodwill – is it personal goodwill and specific to the owner or is it entity goodwill and attributable to the business itself? Resolution of these issues can have a large impact on the determination of the value that is appropriate to use in the property-division settlement.

Business divorces also are not uncommon. Partners who started and grew a business together do not always agree on the future path for the business. When the friction becomes severe enough that joint ownership is no longer in the best interest of the company, the most prudent course of action is often one side buying out the other. An independent opinion of value can help establish a fair price that is acceptable to both parties, which should help to resolve the situation efficiently with minimal disruption to the operations of the organization.

During times of significant change, there are a multitude of decisions to be made and factors to be considered. When one is amid a stressful life event, it can be difficult to make those decisions with a clear head. Mistakes that are made because of lack of clarity can turn into significant regrets down the road.

An independent business valuation during times of death or divorce can be an invaluable tool to help reduce the risk of those potential regrets and increase peace of mind during difficult times.

Interested in learning more about how a valuation can help you or your business? Contact Jay Fullerton at jfullerton@eidebailly.com or 605-977-2706. Or visit eidebailly.com/valuation.

Death and divorce: Valuation considerations

In the realm of business ownership, divorce can have two meanings – personal or business. This tool can help make the related business decisions a little easier.

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