PUBLICATIONS AND RESEARCH

Estate Planning Valuation Insights

Valuation Adjustments (Discounts and Premiums) in Business/Stock Valuations for Estate Planning or Estate Tax Purposes
Trey Stevens
Systematic and nonsystematic valuation adjustments can be either decremental (called valuation discounts) or incremental (called valuation premiums). Systematic adjustments are discounts or premiums that affect business and security valuations across the board-such as level of value adjustments. Nonsystematic adjustments are discounts or premiums that relate to a specific company or security-such as key customer dependence or buy/sell agreement transferability restrictions. This discussion explains the common procedures for identifying the factors or conditions that indicate the need for a nonsystematic valuation adjustment in a business/stock valuation performed for estate planning or estate tax purposes. This discussion explains the common procedures for quantifying nonsystematic valuation adjustments. This article includes several simplified illustrative examples. Finally, this article considers the appropriate sequencing of nonsystematic valuation adjustments in a business/stock valuation performed for estate planning or estate tax purposes.

The Use and Misuse of M&A Transactions in Closely Held Business/Stock Valuations for Estate Planning/Estate Tax Purposes
Charles A. Wilhoite
Valuation analysts often use the guideline merged and acquired company (GMAC) method to value the stock of a closely held or family-owned corporation. This is particularly true when the estate planning/estate tax valuation subject is a controlling ownership interest in the subject closely held corporation. The GMAC method values the subject business/stock by applying pricing multiples (e.g., price/revenue multiples) extracted from actual purchases of guideline (or comparative) operating businesses. The analytical issue associated with the use of the GMAC method is that it may overstate the fair market value (FMV) of the subject business. This is because corporate acquirers often pay more than FMV when they close M&A transactions. This discussion will explain some of the reasons why corporate acquirers sometimes pay more than FMV for M&A deals. And, this discussion will suggest ways for an analyst to identify such transactions so that the analyst can either discard or adjust the pricing multiples extracted from such "overpriced" deals.

The "BIG" Tax Discount in Asset-Based Business/Stock Valuations for Estate Planning or Estate Tax Purposes
James G. Rabe
When the business interest included in the estate of a high net worth individual is an asset holding company, the asset-based valuation approach is particularly applicable. This statement is true whether the asset holding company is a corporation, limited liability company, or family limited partnership. And, this statement is true regardless of whether the assets included in the asset holding company include publicly traded debt or equity securities, the stock of a closely held operating business, real estate, or other investment assets. The asset-based approach involves the discrete appraisal of the individual assets included in the holding company "portfolio." When the portfolio includes appreciated assets, analysts typically consider the built-in capital gains (BIG) tax liability as an adjustment (or discount) to the individual asset values. This discussion summarizes the procedures that analysts commonly use to quantify the BIG tax valuation discount.

Estate Tax and Estate Planning Valuation Guidance from Internal Revenue Service Publications
James J. O'Sullivan and Craig A. Jacobson
Valuation analysts typically seek professional guidance from (1) promulgated professional appraisal standards, (2) published valuation professional association and society publications and pronouncements, (3) valuation credentialling organization training course materials, and (4) the authoritative business valuation literature. When these sources don't address a specific issue, valuation analysts have to turn to other sources for professional guidance. And, when the subject valuation is performed for estate planning/estate tax purposes, analysts often turn to Internal Revenue Service publications. This discussion summarizes the different purposes and different levels of authority of various Internal Revenue Service publications. This discussion is prepared from the perspective of the business appraiser/financial adviser seeking professional guidance on a gift tax, estate tax, or estate planning valuation issue.

Willamette Management Associates Discount for Lack of Voting Rights Study for Estate Planning/Estate Tax Valuations
Timothy J. Meinhart
The nonvoting common stock of a closely held or family-owned corporation is often the subject of a gift tax, estate tax, or estate planning valuation. The most common procedure in the analysis of nonvoting stock is: (1) to value the subject stock as if it was voting stock and then (2) to adjust that initial value indication for a discount for lack of voting rights (DLVR). Willamette Management Associates analysts recently conducted a study of empirical capital market data in order to quantify this DLVR. This discussion (1) summarizes this DLVR study and (2) explains the implications of this DLVR study to estate planning/estate tax valuations.

The Willamette Management Associates Discount for Lack of Marketability Study for Estate Planning/Estate Tax Valuations
Curtis R. Kimball and Mark L. Zyla
Closely held business interests are often valued using the guideline publicly traded company (GPTC) method. In that market approach method, the subject companies/securities are valued by the application of market-derived pricing multiples (e.g., price/earnings multiples). These pricing multiples are extracted from publicly traded company stock prices. The fundamental flaw of this common valuation method is (1) publicly traded company stocks are perfectly liquid securities while (2) closely held company stocks can not be sold on efficient stock exchanges. For this reason, analysts typically adjust the initial GPTC method value indications by applying a discount for lack of marketability (DLOM). For decades, Willamette Management Associates analysts have conducted studies of empirical capital market data in order to quantify this DLOM. This discussion summarizes the results of the most recent Willamette Management Associates DLOM studies.

Differences in the Estate Tax Valuation of Big Businesses and Small Businesses
Robert P. Schweihs
For estate planning valuation purposes, many valuation analysts approach the small, family-owned business or professional practice exactly the same way that they approach the most substantial private corporation. Similarly, for estate tax valuation purposes, many Internal Revenue Service engineers and economists approach the small, closely held business exactly the same way that they approach the largest closely held corporation. In fact, there are more differences between small businesses and large businesses than the size of their financial statement accounts. This discussion summarizes many of the structural, operational, and strategic differences between small businesses and big businesses. And, this discussion explains the significance of these differences from the perspective of the estate planning/estate tax valuation.

Estate Planning and Estate Administration Procedures That Reduce the Risk of Probate Disputes
Peter J. Comodeca, Esq., updated for this issue by Robert F. Reilly Most closely held business owners and other high net worth individuals have a will and a trust as part of their estate plan. While a will and a trust are basic estate planning tools, additional procedures are recommended in order to ensure that (1) the objectives of the deceased are accomplished and (2) the estate is administered effectively and efficiently. This discussion focuses on the estate administration procedures component of the estate plan. These procedures can (1) minimize the burden to be placed on the estate executor, (2) maximize the value of assets available for distribution to beneficiaries, and (3) reduce the risk or probate disputes.

Willamette Management Associates Insights

About the Editors

Mark Zyla Joins the Firm