• Is the analyst certified by a recognized national credentialing organization and subject to standards of work and ethics by that organization?
• Are they current in their education and knowledge?
• Do they have deep and varied experience in valuing businesses (not just the type of business you want to be valued)?
• Do they have a depth of business knowledge outside of just valuing businesses?
• Do they have a reputation for being independent, objective, and reliable?
• Are they clear in their description of the work that is to be done, the information they will need to do the work, the time it will take, and the cost of the valuation engagement?
These unique considerations depend on the context of some of the most common uses of a business valuation.
Estate/Gift
The Internal Revenue Service (IRS) is a highly experienced player on the other team when it comes to the valuation of business interests for estate and gift tax purposes. The valuation expert should have an excellent understanding of the reporting requirements imposed by the IRS, as well as a current and working knowledge of relevant court cases and IRS regulations. A valuation expert engaged early in a planning setting is invaluable to preventing problems “down the road.” Strong knowledge and experience in this type of engagement are essential.
If a family limited partnership (FLP), or similar entity, is being contemplated by the taxpayer, a skilled valuation expert can help design the entity to avoid later issues. The valuation expert can be critical in defending the entity before the IRS.
Employee Stock Ownership Plans
The Department of Labor (“DOL”) is the user of note in these engagements. Their purpose is to (rightfully) ensure a fair valuation for the ESOP participants. As such, it is often best to err on the side of caution when determining a value. This can include some non-standard adjustments such as for compensation and rent paid to related parties. Typically, a valuation analyst only considers those two adjustments if a control position is being valued. We believe that officer/owner compensation and rent paid to related parties should always be considered, if not always adjusted.
In recent months. the DOL has challenged some initial transaction valuations based on too little compensation being paid to the selling officer/owner. The result remains undetermined, but it appears the DOL believes the valuation is too high, resulting in too much consideration paid by the ESOP for the shares. The next logical step is for the DOL to look at all officer/owner compensation in all subsequent valuations, even for minority positions. In our view, being “fair” to employees requires examining these components even in a minority situation.
We’re being proactive on our stance and examining it now.
Where Do I Find Such an Expert?
Call us about your valuation needs. We have the business valuation knowledge and skills to handle most tasks. Or, we can help you locate an experienced professional for your specific
situation.