For many entrepreneurs, the business they’ve built is not just a source of income but a part of the family’s legacy. It embodies hard work, dreams, and the hope for prosperity to be passed down through generations. Yet, an often-overlooked aspect of ensuring this legacy is properly assessing the value of the business. This is especially crucial when it comes to estate planning and addressing the potential impact of taxes. At Legacy Private Trust Company, we recognize the importance of this issue and aim to shed light on the complexities and considerations of valuing a family business.
The Importance of Accurate Valuation
The value of your business significantly influences estate planning and the strategies you should consider for succession. A higher valuation could mean increased tax liabilities for your estate, making it imperative to plan efficiently. However, valuing a business, particularly one that’s not on the market for sale, poses unique challenges. How do you put a price on something you’ve nurtured and grown, including tangible assets like real estate and buildings and intangible ones like reputation and client relationships?
The Art and Science of Business Valuation
Business valuation straddles the line between art and science. It starts with a comprehensive analysis of several key factors that even the IRS considers crucial:
- Historical Performance: The track record of the business provides insight into its resilience and potential for future success.
- Economic and Industry Outlook: Current and future projections for the economy as a whole and your specific industry sector can affect the value.
- Financial Metrics: This includes book value, earning capacity, and the ability to pay dividends.
- Intangible Assets: Goodwill and other intangible assets significantly affect a business’s value.
- Market Comparisons: Sales of comparable companies and any previous transactions involving your company’s stock are also relevant.
Yet, this is just the starting point. Valuation discounts may apply for small businesses, particularly those not publicly traded. These discounts account for factors like lack of marketability and minority interests, which can significantly affect the final valuation. Special considerations may also be given for the potential loss of key personnel.
The Need for Value Expertise
Given the IRS’s expertise in business valuation for tax purposes, business owners must seek expert advice. A thorough and unbiased valuation is essential for tax planning and the overall strategy of passing on your legacy. As the saying goes, “expensive will be cheap.” Investing in a professional appraisal of your business ensures that you’re prepared not just for tax litigation but for the future of your business and your family’s legacy.
At Legacy Private Trust Company, we understand the intricacies of valuing a family business. Whether you’re in the early stages of estate planning or considering succession options, our team is here to provide the expertise and support you need to secure your legacy for future generations.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
