Posts Tagged ‘busniess succession plan’

Proposed IRS Regulations May Eliminate Valuation Discounts for Gifts of Family Ownership

Sunday, September 18, 2016 @ 10:09 AM
Author: Peter Brehm

On August 4, 2016, the IRS published in the Federal Register a set of proposed new regulations under Chapter 14, Section 2704 of the Internal Revenue Code. These proposed regulations would have a significant impact on the valuation of private business entity interests for transfer tax (estate, gift, and generation-skipping) purposes.  Currently, business appraisers will examine real world restrictions on ownership interests (such as limitations of voting rights, control, etc.), and will often apply significant discounts to stock that is gifted to family members.  The discounts are intended to reflect the reality that potential buyers will pay less for stock that is restricted than it will for stock that is not restricted.
Under the proposed regulations, appraisers would be required to conduct valuations assuming hypothetical circumstances that often do not coincide with market conditions.  In other words, appraisers would be expected to assume that restrictions of the stock being transferred do not exist. This would cause them to determine a fair market value that ignores otherwise applicable valuation discounts, resulting in a value determination that may not match what the market would actually pay.
If these regulations are enacted in December 2017 as planned, valuation discounts for transfer interests will essentially be eliminated.  This will redefine how these interests are valued and most likely limit the financial benefits of these transfers.  The proposed changes would affect anyone who plans to transfer equity interests to family members. It is essential to approach this process in the company of a seasoned business valuation expert who is adept at navigating the complex authorities in action during these transfers.

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When Doing Nothing Can Cost You Everything: Why You Need a Business Succession Plan

Thursday, February 11, 2016 @ 12:02 PM
Author: Peter Brehm

No business owner would deliberately risk the very enterprise that could help fund his or her retirement and prove to be a lasting legacy. Yet, an owner who has failed to plan for business-succession or exit upon retirement does exactly that. Here’s how to avoid the sometimes substantial cost of doing nothing.

“Albert” is the 63-year old owner of a profitable retail operation that boasts annual sales (revenue) of around $1 million. Since launching the business 20 years ago, Albert runs the day-to-day operations full time, and has been drawing an annual salary of about $60,000 in recent years. He also employs four part-timers to run the cash registers and stock shelves now and then. Currently, the entity holds about $125,000 worth of inventory (based on current purchase price of items) and around $100,000 in equipment. A quick estimation of the business’s value can be gauged by applying the rule-of-thumb similar businesses (ones selling the same product or service) use in his geographical area: calculate 50% of average annual sales over the past three tax-reporting years.

In Albert’s case, that would amount to a business worth roughly $500,000 (business value including equipment, good will, etc.).

The strain of working 12-hour days in retail is starting to take its toll on Albert’s health, however. Albert agrees that he can’t keep up his current pace much longer, but has procrastinated on actually coming up with a business-transition or succession plan, feeling confused and overwhelmed at the thought of it. “I’ll probably just work until I can’t anymore,” he laughs. When his friends ask what he’d actually do if he were unable to work, he scoffs, “That’ll never happen.” A few weeks later, a fall from a ladder puts Albert in the hospital for several weeks. With no one to take his place, Albert thinks it best to consider closing up for a while, if not permanently. “It had a good run,” he says, thinking that this outcome was probably inevitable.

An All-Too Familiar Story

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