Presented to the Probate Specialty Section of the Cincinnati Paralegal Association (www.cincinnatiparalegals.org).
This seminar highlighted the material aspects of performing a valuation of closely-held businesses for gift and estate planning:
- Estate planners should hire business appraisers to avoid Section 6662 penalties to the client triggered by asset undervaluation (40% additional penalty if value claimed is less than 25% of value finally determined).
- The key variables affecting a business value include: 1) the normal level of net free cash flow; 2) the expected long-term growth of net free cash flow; and 3) the magnitude of the risk of achieving the expected net free cash flow
- Noncontrolling interests (less than 50% ownership) do not have the power to set compensation levels for managers, declare dividends, initiate a sale of the business, and/or hire and fire personnel. A significant discount may be appropriate for noncontrolling interests.
- Unlike public securities, which can be converted into cash in several days, it may take months or years to convert a closely held business interest into cash. A further discount from the value of the non-controlling interest may be appropriate.