Name: Exit Strategies Group, Inc.
Address: 531 E Washington St, Petaluma, CA, 94952, US
Telephone: 707-778-2040

IRS Requires Qualified Appraisals from Qualified Appraisers

November 6, 2013/in Business Valuation /by Al Statz

Taxpayers should be aware and tax practitioners must know that Internal Revenue Service regulations for filing of estate and gift tax returns and charitable contributions involving business interests worth more than $5,000 require a qualified (business) appraisal by a qualified (business) appraiser. How do our friends at the IRS define these terms you ask? Please read on …

The IRS defines a qualified appraisal as an appraisal report that:

is made, signed and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
meets the relevant requirements of IRC Regulations section 1.170A-13(c)(3) and Notice 2006-96, 2006-46 I.R.B. 902 (available at www.irs.gov/irb/2006-46_IRB/ar13.html);
relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property;
does not involve a prohibited appraisal fee; and
includes specific information, such as a property description, terms of the sale agreement, appraiser identification information, date of valuation and valuation methods employed, among other requirements.

And the IRS defines a qualified appraiser as an individual who:

Has earned an appraisal designation from a recognized professional appraisal organization (such as the ASA, NACVA, IBA, etc.) or has met certain minimum education and experience requirements
Regularly prepares appraisals for which the individual is paid
Demonstrates verifiable education and experience in valuing the type of property being appraised
Has not been prohibited from practicing before the IRS under section 330(c) of Title 31 of the United States Code at any time during the three-year period ending on the date of the appraisal
Is not an excluded individual (someone who is the donor or recipient of the property).

The IRS is serious about the quality and reliability of appraisals submitted with tax returns. Tax practitioners need to pay attention to the credentials and experience of the appraisers they select and understand the type appraisal reports that they obtain. When you need a business appraisal for a tax filing, our appraisers would be happy to discuss the appropriate scope of valuation analysis and report for your particular needs.

Engagement Review: Valuation for Partnership Dispute

October 3, 2013/in Business Valuation /by Roy Martinez

Recently, Exit Strategies was engaged to perform a business valuation to resolve a dispute between partners in an Environmental Consulting Firm.

Facts and Circumstances

There were four equal partners (LLC members in this case). The firm’s business model had evolved over the years in response to changing market conditions, and the owners’ objective was to have one of the partners leave the firm and have the remaining partners acquire the equity of the departing partner. The company did not have a written buy-sell agreement that defined valuation in the event of a buyout. The parties were at an impasse as to the value of the 25% interest. Tensions were high and business performance was beginning to suffer.

The Result

Exit Strategies was called in by the company’s law firm to perform an independent business valuation for the buy-sell. We were asked to determine the fair market value of the subject interest and present our conclusion to the partners in an objective, clear and convincing manner. We were retained by the company and we asked all shareholders to sign our engagement letter.

With our valuation in hand, which clearly laid out the data, assumptions, material factors, approaches, methods and calculations that led to our conclusion of value, the feuding partners were able to quickly resolve their differences, culminating in an agreement between the parties and an amicable buyout.

Lessons Learned

Exit Strategies regularly performs valuations for Buy-Sell transactions between equity holders, using an appropriate level of due diligence, analysis and reporting that gives shareholders the information and confidence they need to make decisions.

Shareholder buyouts (and buy-ins) periodically occur in privately held companies involving multiple shareholders. In our experience, for buy-sell transactions to be successful, all shareholders, whether departing, remaining or incoming, must believe that they are being treated fairly.

Regardless of whether or not a Buy-Sell Agreement exists, a well-documented professional business valuation as of the transaction date is a major step toward keeping personal bias and emotions in check, and enabling the equity holders to reach an amicable agreement. In most instances, valuation is the most important element, and the sooner it is addressed the better for all concerned.

A third party valuation often serves as a great foundation to facilitate an agreement. With a professional business valuation in hand, shareholders are not only more likely to negotiate successful transactions, but also avoid costly, distracting and time consuming disputes that harm the business and personal relationships.

Exit Strategies Group, Inc. conducts business valuations for a variety of purposes including negotiating a sale, securing financing, settling a legal dispute, gift and estate tax, divorce, and shareholder buy-sell to name a few. For more information or to discuss an immediate need, you can reach J. Roy Martinez at 707-778-2040 or jroymartinez@exitstrategiesgroup.com.

Role of Business Appraisers and M&A Advisors in Estates and Trusts

August 8, 2013/in Business Valuation, Exit Planning /by Al Statz

I was recently asked about Exit Strategies’ role as business appraisers and M&A advisors in estates, estate planning and trust administration. Here was my answer …

Business Valuation (a.k.a. Appraisal)

As business valuation experts, we provide fair market value appraisals of closely-held corporations, FLPs and LLCs for estate planning, gifting, estate tax, charitable donations, buy-sell transactions and succession planning. We value fractional interests in operating companies and asset holding companies using appropriate discounts. Our appraisers adhere to recognized professional standards, perform appropriate due diligence and meet or exceed accepted reporting requirements. And of course we are prepared to defend our work in the unlikely event of an IRS challenge.

For estates containing closely held business interests, we determine value of the decedent’s interest. We can provide input to the attorney on the effect of using the alternative valuation date.

With regard to trust administration, when a privately held business interest is placed in trust, our business valuation can help the fiduciary establish a baseline value and enhance their understanding of the asset. An independent business valuation can also avoid any potential for conflict of interest, since fees charged by trustees are often based upon the value of the assets managed. Subsequent valuations may be ordered by the fiduciary to assess the investment’s performance over time.

In estate planning where a family business is one of the owner’s major assets, a business valuation is often the starting point for estate planning professionals as they consider various estate planning techniques. Valuations provide a basis for the owner to evaluate potential ownership transfers and gifts; and can safeguard against future IRS challenges.

Landscape photo by Lance Kuehne

When drafting entity agreement and buy-sell agreement terms, attorneys have to balance flexibility and efficiency of operations with restricting control and marketability. During this stage, we can identify problem valuation situations or problem assets and identify the effects of gift and estate planning alternatives on valuation. We can also provide feedback and input on operating agreement terms that impact value.

When business owners gift ownership in their businesses, we determine value as of the date of gift. When closely held business interests are donated to a Charitable Remainder Trust (CRT), our business valuation can support the charitable deduction by the donor taxpayer.

Sometimes estate planning involves business succession planning. Like estate planning, real business succession planning is emotionally charged and often meets with resistance from clients. A business valuation provides an objective look at many aspects of a business, including its management, marketability, inherent risks, and future prospects. The very act of going through the valuation process with an experienced and independent appraiser sometimes provides the catalyst that owners and their families need to fully engage in succession and wealth transfer planning.

M&A Advisors (a.k.a. business brokers, investment bankers, intermediaries, etc.)

There are many instances in which a generational transfer of a family-owned business is not the best option for a family. Often the children aren’t qualified to run the company or simply aren’t interested. Or the industry may be consolidating and an opportunity exists to sell the business for far more than fair market value and create substantial wealth and liquidity for the family.

Here, our firm regularly advises owners in the positioning, document preparation, strategic marketing and confidential selling process. We lead the M&A sale process for the client and work alongside their tax and legal advisors to maximize proceeds and preserve wealth.

Business valuations and M&A brokerage play a part in many estate and trust matters and succession planning for family owned businesses. For additional information or for advice on a current need, you can call Exit Strategies’ founder and president Al Statz at 707-781-8580.

Goodwill Part II: Goodwill vs. Goodwill Value

March 22, 2013/in Acquire a Business, Business Valuation, Sell a Business /by Bob Altieri

All businesses have goodwill; however, not all businesses have goodwill value!

Goodwill, which is usually the largest portion of the purchase price of a business, is the sum of intangibles such as having a good location and trade dress, a negotiated lease in place, trained employees, a website, customers, etc. Not all businesses have goodwill value, which is measured by the amount of earnings the business produces adjusted for the risk of earnings continuing to flow into the future, since all value is in anticipation of future economic benefit.

IRS Revenue Ruling 68-609¹ defines this very well. The Ruling states that goodwill value is that component of the earnings stream that is in excess of a reasonable rate of return on the investment made in the Tangible Assets (furniture, fixtures, equipment and vehicles) that the business owns, AND after paying the owner a reasonable market wage for his/her services in the business. The latter is often referred to as a “return on labor,” which has nothing to do with the value of the business since a prospective buyer can get a management job in the same industry and obtain a market rate of compensation without investing a dime in a business opportunity. If there are earnings in excess of these two requirements it must be attributable to goodwill value.

[1] During prohibition, this was the formula designed by our government to fairly compensate owners of spirit, wine, or beer producers before closing them down. It might be the only good thing that came out of prohibition!

Personal versus Enterprise Goodwill in a Business Sale

February 22, 2013/in Acquire a Business, Business Valuation, Sell a Business /by Bob Altieri

Goodwill can exist in two different forms:

Personal Goodwill, which is defined as an intangible asset that is attached to a person; and
Enterprise Goodwill, also an intangible asset that is attached to a business enterprise.

If goodwill is attached to an individual, it is non-severable since the person to which it is attached is not being sold. This also implies that the asset is non-transferable. Of course we often establish contractual arrangements between the parties to lessen the non-transferable portion of personal goodwill to some degree. The ability to pull this off depends on the size and nature of the business being transferred. Smaller businesses tend to have more personal goodwill due to the owner’s personal contact with customers or channel partners, or unique skills (e.g. a chef in a restaurant operation, a surgeon, etc.).

With enterprise goodwill being attached to the enterprise, this asset is indeed transferable because it is a part of the business being sold. So it may be obvious that enterprise goodwill usually transfers to the buyer without special arrangements. Personal goodwill, on the other hand, requires much deeper analysis to determine how and how much of this intangible asset is reasonably transferrable to a willing buyer.

Enterprise goodwill has transferable value, whereas personal goodwill may or may not have transferable value.

Without proper analysis of goodwill value, whether or not it is related to an individual (usually the owner), and thoughtful strategies for the transfer of the personal goodwill component, the value of a business can be significantly distorted (diminished).

Independent Valuation Litigation Support

January 18, 2013/in Business Valuation /by Bob Altieri

This week I was asked to value a medical practice, relating to a dispute between shareholders. Before I head off to my secret fishing spot for the weekend, I want to share these thoughts about how independent valuation experts assist in the litigation or dispute resolution process.

Business valuation and transaction professionals are frequently engaged as independent financial experts for purposes of assisting in dispute resolution, litigation, or potential litigation. Litigation support services include any professional assistance provided to a client in a matter involving pending or potential litigation or dispute resolution proceedings before a trier of fact.

In rendering litigation support services, the expert may be retained to provide an expert opinion on the financial effects of facts and assumptions. In addition to forming an expert opinion, the expert may value a business, project future financial results, analyze the performance of a business operation, interpret financial data, opine on an impaired streamof earnings, or render other similar types of professional services.

In providing litigation-support services, an independent financial expert may play a role as:

Expert. One who is qualified by knowledge, skill, experience, training, or education in performing business valuation services and/or related financial analyses.
Expert Witness. An expert who is engaged to explain technical, scientific, or specialized knowledge in order to assist the trier of fact in understanding evidence.
Arbitrator. An expert who serves as a trier of fact in an alternative dispute resolution context.
Court-Appointed Expert. An expert who is engaged by a court to assist the trier of fact.
Consulting or Advisory Expert. An expert who is engaged to review another expert’s work product or who is engaged to advise the client, lawyer or another expert witness about technical matters relating to the subject litigation, but who will not be called to testify at trial, and may or may not be independent. Accordingly, this Procedural Guideline may not apply to such an expert.

Expiration of $5.12 Million Gift Tax Exemption Presents Unique Gifting Opportunity

November 9, 2012/in Business Valuation, Exit Planning /by Al Statz

As a result of the tax cuts enacted under former President George W. Bush and extended under President Barack Obama, the estate and gift tax currently is set at a maximum rate of 35% with a $5.12 million exemption amount. But unless Congress takes action, the maximum estate and gift tax rate will revert to 55% and the exemption amount to $1 million, effective January 1, 2013.

It is uncertain what, if anything, Congress will do. But given the impending “fiscal cliff” and substantial pressures to increase taxes, particularly on those with high net worth, there would appear to be a significant possibility that the estate and gift tax environment will become less favorable after the end of 2012.

As a result, there could be a one-time opportunity to make substantial gifts without incurring gift tax. Since the gift and estate taxes are unified, an individual currently can make gifts up to $5.12 million (and a married couple up to $10.24 million) without incurring gift tax. These amounts are set to reduce to $1 million for an individual and $2 million for a couple, effective January 1, 2013.

Exit Strategies appraises operating companies and asset holding companies for gifting, estate tax, and other purposes. You must establish fair market value of gifted assets as of the date of gift, and an independent valuation by a qualified business appraiser is often your best defense against an IRS challenge. For fractional interests, we quantify appropriate discounts for lack of control and marketability. Our quality valuation reports comply with USPAP and IRS business valuation standards, and we are prepared to defend our work in the unlikely event of an IRS audit.

If you think you might benefit from making sizeable gifts before year-end, contact your CPA and/or tax attorney right away, while there still is time to formulate and implement an appropriate strategy. Time is running out.

Business Valuation Rules of Thumb

September 21, 2012/in Business Valuation /by Bob Altieri

A valuation “Rule of Thumb” is a mathematical relationship between price and one or more variables, based on experience, observation, hearsay, or a combination of these, applicable to businesses within a specific industry. The Business Reference Guide published by Business Brokerage Press is a common resource for people involved in valuing, buying or selling privately held businesses. The guide contains rule-of-thumb and pricing tips on hundreds of types of small businesses. Below are a few of the price/sales rules of thumb presented in the guide:

Industry	Valuation Rule of Thumb
Accounting Firms	100–125% of annual revenues
Auto Dealers (New Cars)	0–10% of annual sales + inventory
Day Care Centers	45–50% of annual sales
Dental Practices	60–65% of annual revenues
Distribution / Wholesale in general	50% of annual sales + inventory
Engineering Services	40–45% of annual revenues
Grocery Stores (Supermarkets)	15% of annuals sales + inventory
Hardware Stores	45% of annual sales incl. inventory
Landscape Businesses	45% of annual sales
Machine Shops	55–65% of annual sales incl. inventory

Be aware that there are disadvantages to using rules of thumb, and they should never be relied upon by themselves to appraise a business or price a business for sale. For example, applying one of the above rules of thumb to your company would assume that its cost structure, risks and growth prospects are identical to the industry average company. This is almost never the case! We use rules of thumb, when available, as a sanity check on values produced by accepted business valuation methods, and the Business Reference Guide is often the first place we look.

Valuations for SBA Business Acquisition Loans

September 10, 2011/in Business Valuation /by Al Statz

Determining the value of a business is a key aspect of an SBA lender’s underwriting process for loan applications involving a business acquisition (change of ownership).

According to SBA Standard Oprating Procedure 50-10-5(c), paragragh (i), page 179, for all business acquisition loans over $350,000, or whenever a buyer and seller have a close relationship, the lender must obtain an independent business valuation from a qualified source. Examples of “close relationships” include transactions between: Employer-Employee; Family members; Co-Owners; and any parties that have an existing, non-arms-length relationship. A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by a recognized organization.

As Certified Business Appraiser’s (CBA’s) accredited through the Institute of Business Appraisers, Exit Strategies Group, Inc., is a qualified source for business appraisals for SBA loans.

Exit Strategies provides quality, SBA- and USPAP-compliant valuation reports within 2 weeks, at a competitive cost.

Lenders may call Bob Altieri, CBA, at 530-478-9790 to request a quote or receive a sample SBA loan valuation report.

Exit Strategies Joins National Business Valuation Group

July 26, 2011/in Business Valuation, News /by Al Statz

Exit Strategies has joined forces with National Business Valuation Group, LLC, a consortium of independent business valuation and litigation support firms that have affiliated in order to provide clients with highest quality professional expertise. The relationship between offices allows each firm to provide its clients with technical, database, industry, geographic and consulting expertise that would not be available from typical business valuation firms. Offices regularly communicate with each other regarding specific cases and valuation issues in order to ensure the highest quality work for clients.

Each office in the group is required to have senior level business appraisers with either Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA) professional designations, the most coveted and difficult professional designations to obtain.