Do I need to hire a financial advisory firm to determine the value of my private business interests that I am gifting, or that are part of an estate?
Yes, if you would like to significantly reduce your risk of paying tax penalties. Determining the fair market value of a private business is often complex and challenging. To avoid errors, it is best to hire a financial advisory firm with significant business appraisal experience. You are subject to Section 6662 penalties, up to 40% of the amount you undervalued the business, if the value you claim is less than 25% of the value determined by the IRS. These penalties are generally avoidable if a qualified appraisal is prepared by a competent financial advisory firm.
A second important benefit of hiring an experienced financial advisory firm is that they understand the appropriate discounts applicable to non-controlling and non-marketable equity interests. For example, a 100% interest in Private Business A, may be worth $1,000,000. However, a 20% interest in Business A may be worth far less than $200,000, its pro-rata value. Numerous studies demonstrate that investors will only pay a portion of the $200,000 pro-rata value for a 20% non-controlling, non-marketable interest. Therefore, the taxpayer who neglects to hire an experienced financial advisory firm may pay taxes based on a $200,000 value, while the taxpayer who hires the experienced financial advisory firm may pay taxes based on a $100,000 value, a 50% tax savings.
The Malibu Group has significant experience and expertise determining the value of private businesses. We have performed hundreds of business valuations for a variety of purposes including mergers & acquisitions, buy/sell agreements, gift & estate tax planning, fairness opinions, GAAP requirements, S-Corp conversions, ESOPs, shareholder litigation, and divorce cases. Our directors hold professional designations including: Accredited Member of the American Society of Appraisers, Chartered Financial Analyst, Certified Public Accountant, and Master in Business Administration from top MBA programs. Please contact Kevin Kennealy, the Director of Business Valuations, for more information on The Malibu Group's business valuation services. Kevin can be reached at 513-583-5413 ext. 182, or by email at Kevin@malibugrp.com.