Valuation

December 16, 2024

Timing Matters: Tax Court Disregards Asset Transfers

The IRS often challenges “inter vivos” transfers of property that reduce estate tax liabilities and a common issue is whether there was a bona fide business purpose or if it was simply a pretext to avoid taxes.
A poorly conceived transfer, however, can lead to advers financial consequences through accuracy-related penalties, which were assessed here against the estate for underpayment of tax.
The timing of the transfers is a key consideration and will be examined to determine if there was was a bona fide reason for the transfer.

Transfers of business interests routinely seek to benefit from the discounts that accompany lack or control and marketability. Reducing the assets in an estate obviously reduces estate tax liability and the application of discounts in the transfer made during one’s life can result in significant tax savings.

The IRS, howevechallenges these “inter vivos” transactions, and a common issue r, often is whether there was a bona fide business purpose or if it was simply a pretext to avoid taxes.

On this issue, timing may be everything. And the price if missteps is significant.

The Tax Court’s decision in Estate of Fields v. Commissioner of Internal Revenue, illustrates how timing, retained interests, and procedural missteps in estate planning can lead to significant tax liabilities.

The opinion is discussed in detail in my post on the

The case also underscores the potential financial consequences through accuracy-related penalties, which were assessed here against the estate for underpayment of tax. We take a look here at the facts, procedural history, legal principles, the 20 percent penalty assessment, and the key takeaways for estate planning professionals. Valuation Attorneys | Valuiation Lawyer

As the Tax Court judge noted, if the strategy is too good to be true, it probably is.

Key Facts: Ms. Fields’ Life, Assets, and Planning

Anne Milner Fields, a Texas resident, built considerable wealth managing an oil business she inherited from her late husband. By 2016, Ms. Fields was 91 years old, battling Alzheimer’s, and reliant on her great-nephew Bryan Milner to manage her financial affairs. Mr. Milner held a power of attorney and implemented an estate planning strategy just a month before Ms. Fields passed away.

October 8, 2024

What a Formal Valuation Reveals About Your Closely Held Business

by Jay R. McDaniel, Esq.

Effective strategic planning for the closely held business owner should begin with a formal valuation.
The information gathered and considered in a business appraisal provides insights into the business overlooked in day-to-day operations.
Valuation studies provide an insight into the potential value of the business and roadmap to to becoming a ‘best in class’ enterprise.

You own a business. You’re deeply familiar with your company’s day-to-day operations, challenges, and triumphs. You have invested your time, energy, and resources into its success.

You may have a rough estimate of what it is worth, guided by your years of experience, what you know of your industry, what you hear on the grapevine and your gut instincts. (Stastics tell us that more often than not, your beliefs are pretty inaccuate.) Money_Coin_Stack_On_White_Background_original_1746958-1024x683

Valuation: the First Step to a Successful Strategic Plan

The business owner who really wants to understand the value of a business and make informed decisions, you need an objective, data-driven analysis. This is where a formal business valuation is usually indispensable.

A formal valuation tells you the value today, of course. But to the the owners of the business, it is, or should be, much more than that number. A formal valuation conducted by a Certified Valuation Analyst (CVA) or other qualified professional is a full diagnostic exam for your business. It yields information you won’t get anywhere else.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

Here’s an example. A valuation focuses on comparisons to other similarly situation companies. Here is a snippet of analysis of key financial data from a calclulation report. It compares the performance of the company being valued with its competitors in the same industry in key areas using a percentage-based analysis.

RMA-Study-copy

A good, formal valuation drills down into a company’s financial and operational health, revealing insights that might otherwise remain hidden. This particular report tells us that this business is lagging on its ability to generate gross profits and that in other areas it is the middle of the pack.

Exceptional value in a business isn’t driven by mediocrity, and if and when the owners of this business try to find a buyer, these numbers will be reflected in a business that either cannot be sold or that is being sold at a much lower value than it could have brought.

September 30, 2024

Protect the Intagible Assets of a Closely Held Business with Bulletproofing

by Jay R. McDaniel, Esq.

Intangible assets are typically the most valuable possession of a closely held business, but often are poorly protected.
Risk mitigation through a business bulletproofing process can protect those assets from being misappropriated.
Intangible assets include customer relationships and intellectual property.

I sometimes ask closely held business owners if they lock the doors to their business when they leave. The answer is ‘of course.’ I may push further. Do you have an alarm system? What about at home?

No surprises here. Everyone locks the door. Most have alarms. My follow-up question is ‘for what?’ The answer, again, is obvious. We lock doors to prevent thieves from stealing our stuff. Then why do so many of us do nothing to stop thieves from stealing what is commonly the most valuable asset of our businesses? Risk Mitigation through Business Buletproofing

Bulletproofed Businesses are Protected Against Theft of Intangible Assets

So many closely held business owners protect themselves against the theft of office equipment, but leave the doors wide open and invite thieves to help themselves to their most valuable property—those intangible assets that drive sales and efficiency.

The value of these assets is rarely reflected on our company’s balance sheet. Instead, the value is found in the knowledge and skills of our employees, the relationships we have with customers, and the reputation we have built in the market.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

Many closely held business owners have no clear idea of the value of their intangible assets and are badly misinformed about what can be protected and how that is done. I am surprised how often my clients think they there is nothing they can do, and how little importance they give to writing down what they have. Continue reading

September 23, 2024

Five Reasons Why Exit and Succession Planning is Not Optional

by Jay R. McDaniel, Esq.

The Need to Exit Our Closely Held Business is Non-negotiable. We all leave, eventually.
Exit and succession planning protects our business, our employees, and our families.
The effects of most business disasters are avoidable.

“Hope is not a strategy.” Vince Lombardi

If you own a business, you know that ‘winging it’” is not much of a business plan; it’s a recipe for disaster. Exit and succession planning isn’t a luxury; it’s a necessity. It’s not about if you’ll exit your business, but how and when. Lombardi during his career went from assistant coach at St. Cecilia’s High School in Englewood, New Jersey, to leading the Green Packers to two Superbowl victories. Lombardi always had a plan. He wasn’t talking about guiding a closely held business, but the thinking fits. And here is why.

1. The Inescapable Reality: The Grim Reaper is Undefeated

Let’s start with the cold, hard truth of mortality. No matter how invincible we feel today, there will come a time when we will no longer lead our business. We know that to be the truth. We are all leaving the job. Planning helps us avoid the potential that we leave feet first.

In much the same way, we know that we need the income from our business to support our lifestyle and the people that matter to us. Yet, if we are like most closely held business owners, we are all in on the company and the business is the largest single asset we own — in many cases, 75% of our net worth.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

We might envision a graceful retirement, maybe golden years on a beach somewhere. Or maybe from our status as entrepreneur emeritus, watching approvingly as the next generation carries on our legacy. It’s fuzzy and warm. But without a plan, the chances of that happening are like winning the lottery.

Without a well-defined exit plan, our business faces a chaotic and uncertain future. Our families and our employees, could be forced to make hasty, ill-informed decisions about the fate of the company.

September 13, 2024

Answering Personal Life Questions: Key to an Effective Exit Plan

by Jay R. McDaniel, Esq.

Business owners that fail to plan for their lives after exiting their business often report ‘seller’s remorse’ and dissatisfaction with their lives.
Understanding and planning for the personal after exiting a business focuses on two-part personal question: who we are outside of our business and what are our personal goals.
Formal written plans for life after exiting a business are a critical aspect of exit planning.

Business owners thinking about exiting their companies tend to focus on financial and operational considerations. However, an often-overlooked, yet crucial component is the personal leg of the exit planning stool, a framework popularized by the Exit Planning Institute (EPI). Effective exit planning, as outlined by the EPI, involves balancing three critical legs of an exit planning stool: business, personal, and financial. This more-holistic approach ensures that all aspects of the owner’s life are considered to achieve a successful transition.

The personal leg, which encompasses the owner’s personal goals, well-being, and plans for life after the business, is frequently neglected in favor of more tangible financial or business concerns. However, the EPI’s 2019 and 2023 surveys show that business owners who fail to plan personally for life after the transition are at risk of dissatisfaction post-exit, potentially leading to “seller’s remorse.” Continue reading

September 9, 2024

Supreme Court Decision Upsets Succession Planning Norms

by Jay R. McDaniel, Esq.

Using keyman insurance to fund equity redemptions is likely to increase estate tax liability.
US Supreme Court holds that keyman insurance proceeds of company-owned policies are an asset of the company, regardless of a contractual obligation to fund an equity redemption.
Cross-purchase agreements funded by insurance should avoid these estate tax liability issues.

Effective succession and exit plans commonly use insurance as a funding vehicle to protect the owners from the economic effects of the death or disability of one of the principals. If an owner dies or becomes disabled, the insurance kicks in to fund the cost of a buy-sell agreement, ensuring a smooth transition of ownership.

The reason: When business owners die, the transition of their shares will disrupt the company and create financial burdens for the surviving shareholders or the company itself unless the owners have a plan in place.

The Importance of Keyman Insurance to Closely Held Businesses

To address this need, closely held businesses often use keyman life insurance in conjunction with buy-sell agreements. These agreements ensure that ownership transitions smoothly, and the business continues operating without major financial strain. (Insurance and other financial vehicles are also effective means of funding a transition out of the business for retirement.)

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

However, the structure and tax implications of the insurance-funded plan can differ depending on whether it is used in a redemption agreement or a cross-purchase agreement. After a recent United States Supreme Court decision imposing a million-dollar deficiency on an estate, closely held business owners need to review any insurance-funded plans to ensure that they are not unwittingly taking on an estate tax burden.

The Supreme Court Upsets the Status Quo

The Supreme Court’s landmark decision in Connelly v. United States is unwelcome news for those closely held businesses that have purchased keyman policies to fund the company’s purchase, or redemption, of a deceased shareholder’s interest. Continue reading

June 23, 2024

Use of Control Premium Inflated ESOP Stock by 61 Percent, ESOP Says

by Jay R. McDaniel, Esq.

The application of a control premium more than doubled the claimed value of a business purchased its employees through and ESOP
An investment banking firm involved in the transaction is subject to claims that it was biased because the fee it earned was contingent on the purchase price.
The valuation firm that conducted the annual valuation required by federal regulations faces claims that it was not independent.

A valuation that applied a control premium to shares acquired by an Employee Stock Ownership Plan (ESOP) would have inflated the value of the now-bankrupt company by as much as 61 percent, according to the plaintiffs in an action against the trustees of the ESOP, its investment bank and the firms that valued the business.

In a case heard by the Seventh Circuit Court of Appeals, the plaintiff’s claims of breach of fiduciary duty and engaging in prohibited transactions under the federal Employee Retirement Income Security Act (ERISA) were upheld even though the defendants wanted to dismiss the complaint. This was because the plaintiff sufficiently alleged wrongdoing in the valuation of the business.

ESOP Owning Bankrupt Company Sues Over Value Reports

The Seventh Circuit Court of Appeals in Appvion Inc. Retirement Savings and Employee Ownership Plan v. Butha held that the plaintiff’s claims for ERISA violations related to the valuation of the A valuation that applied a control premium to shares acquired by an Employee Stock Ownership Plan (ESOP) would have inflated the value of the now-bankrupt company by as much as 61 percent, according to the plaintiffs in an action against the trustees of the ESOP, its investment bank and the firms that valued the business. business after 2012 would proceed.

The gist of the plaintiff’s claims in the lawsuit is that employees approved the acquisition of the stock of the company based on the flawed valuation presented by an investment banking firm that received a contingent success fee of more than $8 million and that the annual valuations of the company were inaccurate and misleading.

March 10, 2024

Unlocking Your Business’s Potential: The 7 Key Reasons for Valuing a Business

by Jay R. McDaniel, Esq.

Understanding the valuation of the business is critical to the owners of closely held business in planning and management.
Closely held business owners typically have most of their personal wealth tied up in their company, but rarely know the current value of the enterprise.
Current valuation data is important for strategic planning, dispute avoidance, insurance purchases and tax compliance.

Business Valuation for Closely Held Business Owners

Understanding the value of your business is critical to the management and operation of a business, to protecting the value of the business, and to planning for the future. Many owners see valuation as an issue that you need to look at at certain stages in the life of the business—wwhen someone dies or gets divorced, when it’s sold, or when there’s a tax issue.

That value, however, doesn’t consider other, crucial reasons why valuation is necessary for the business owner. The reasons are both defensive and offensive. For example, you cannot know how much insurance you need for your business if you’re just guessing about what it’s worth. You need this information for the defensive purpose of protecting your investment.

Offensively, business valuation is a strategic tool that offers insight, guides decisions, and uncovers opportunities for growth.

Business owners, on average, have about 80 percent of their personal assets tied up in their businesses. But four in ten owners of closely held businesses have never had a formal valuation of their business done. Many more owners do not have a clear picture of what the business is worth today. Continue reading

July 10, 2023

Competition and the Value of a Business are Closely Tied

by Jay R. McDaniel, Esq.

Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.
Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.
As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.
Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.

Lawyers who are prohibited by the rules of professional ethics from any restriction on competition. A real estate management company where the principals each work their own book of business. A design-build firm in which a single principle generates the vast majority of the business. An outside sales organization in which the owners divide profits based on origination.

All of these examples raise the thorny issue of who owns the goodwill that is responsible for the future earnings capacity of the business. Does the reputation of the business belong to the business, or to the individuals? As one commentator put, does the goodwill of the business go home for dinner every night?

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

The issue of who owns the goodwill — the enterprise or the individuals— is likely to become even more important as the general sentiment is turning away from enforcing agreement not to compete and various states and federal agencies are taking steps restrict the imposition of agreements that restrict competition after employment. Continue reading

May 23, 2023

The Equitable Value of an Oppressed Minority Shareholder’s Interest

by Jay R. McDaniel, Esq.

A New Jersey Court conducing the valuation of a business may use any technique or method generally acceptable in the financial community.
The application of a minority discount is a question of law, but likely will be based on the factual determinations of the court about the culpability of the litigants.
Business divorces cases are commonly heard in the Chancery Division, a court of equity in which principles of fairness and justice may be applied in addition to any statutory cause of action.
New Jersey’s statutory cause of action for oppression of a minority shareholder does not prevent the court from providing equitable remedies available outside the statute as a matter of common law.

New Jersey Business Valuation ATORNEY In Sipko v. Kroger, the New Jersey Supreme Court declined to apply a minority discount in valuing the interest of a minority shareholder.

There was no real surprise there. New Jersey courts are reluctant to apply a minority discount in the valuation of closely held businesses, which reduces the value of the minority interest. Those discounts, which can signicantly lower the value of an interest — often by a third, or more — tend to reward wrongdoers. Continue reading

The IRS often challenges “inter vivos” transfers of property that reduce estate tax liabilities and a common issue is whether there was a bona fide business purpose or if it was simply a pretext to avoid taxes.

A poorly conceived transfer, however, can lead to advers financial consequences through accuracy-related penalties, which were assessed here against the estate for underpayment of tax.

The timing of the transfers is a key consideration and will be examined to determine if there was was a bona fide reason for the transfer.

Key Facts: Ms. Fields’ Life, Assets, and Planning

Effective strategic planning for the closely held business owner should begin with a formal valuation.

The information gathered and considered in a business appraisal provides insights into the business overlooked in day-to-day operations.

Valuation studies provide an insight into the potential value of the business and roadmap to to becoming a ‘best in class’ enterprise.

Valuation: the First Step to a Successful Strategic Plan

Intangible assets are typically the most valuable possession of a closely held business, but often are poorly protected.

Risk mitigation through a business bulletproofing process can protect those assets from being misappropriated.

Intangible assets include customer relationships and intellectual property.

Bulletproofed Businesses are Protected Against Theft of Intangible Assets

The Need to Exit Our Closely Held Business is Non-negotiable. We all leave, eventually.

Exit and succession planning protects our business, our employees, and our families.

The effects of most business disasters are avoidable.

1. The Inescapable Reality: The Grim Reaper is Undefeated

Business owners that fail to plan for their lives after exiting their business often report ‘seller’s remorse’ and dissatisfaction with their lives.

Understanding and planning for the personal after exiting a business focuses on two-part personal question: who we are outside of our business and what are our personal goals.

Formal written plans for life after exiting a business are a critical aspect of exit planning.

Using keyman insurance to fund equity redemptions is likely to increase estate tax liability.

US Supreme Court holds that keyman insurance proceeds of company-owned policies are an asset of the company, regardless of a contractual obligation to fund an equity redemption.

Cross-purchase agreements funded by insurance should avoid these estate tax liability issues.

The Importance of Keyman Insurance to Closely Held Businesses

The Supreme Court Upsets the Status Quo

The application of a control premium more than doubled the claimed value of a business purchased its employees through and ESOP

An investment banking firm involved in the transaction is subject to claims that it was biased because the fee it earned was contingent on the purchase price.

The valuation firm that conducted the annual valuation required by federal regulations faces claims that it was not independent.

ESOP Owning Bankrupt Company Sues Over Value Reports

Understanding the valuation of the business is critical to the owners of closely held business in planning and management.

Closely held business owners typically have most of their personal wealth tied up in their company, but rarely know the current value of the enterprise.

Current valuation data is important for strategic planning, dispute avoidance, insurance purchases and tax compliance.

Enterprise goodwill is the expectation that a business has in the continued patronage by its customers, regardless of the individuals involved. Personal goodwill is the expectation of continued patronage because of an individual’s continued participation in the business.

Personal goodwill is not an asset owned by a business, but it may be acquired through contractual arrangements including employment contracts and agreements not to compete with the business after employment.

As post-employment restrictive covenants become more difficult to enforce, the equity value of small, service-oriented businesses will be lowered.

Whether the closely held business is the owner of the goodwill that produces its revenue is a critical issue when valuing the entity.

A New Jersey Court conducing the valuation of a business may use any technique or method generally acceptable in the financial community.

The application of a minority discount is a question of law, but likely will be based on the factual determinations of the court about the culpability of the litigants.

Business divorces cases are commonly heard in the Chancery Division, a court of equity in which principles of fairness and justice may be applied in addition to any statutory cause of action.

New Jersey’s statutory cause of action for oppression of a minority shareholder does not prevent the court from providing equitable remedies available outside the statute as a matter of common law.