When it comes to making informed financial decisions about your business, one question often stands out: Do you need a business valuation? Whether you’re planning for the future or addressing specific financial events, understanding the true value of your business is crucial. Business valuations are not just about determining worth; they provide essential insights that can guide strategic decisions and ensure compliance with various legal and financial requirements. From estate planning and mergers to resolving disputes and maximizing tax benefits, a business valuation can play a pivotal role in your financial strategy.

Why Business Valuations Matter

Business valuations serve various purposes, often driven by specific events or anticipated changes. Here are some common scenarios where a valuation is essential:

– Estate and Gift Tax Planning: Accurate valuations are vital for estate and gift tax reporting to optimize tax strategies and ensure compliance.

– Buy/Sell Agreements: Valuations help set fair terms in buy/sell agreements between business partners or shareholders.

– Mergers, Acquisitions, and Reorganizations: Essential for assessing business worth during mergers, acquisitions, or structural changes.

– Shareholder or Partner Disputes: Provides an objective basis for resolving conflicts between shareholders or partners.

– Litigation Support: Required for business damages, bankruptcy proceedings, and other legal matters.

– Marital Dissolution: Determines the value of business interests as part of asset division in divorce proceedings.

– Employee Stock Ownership Plans (ESOPs): Ensures compliance with IRS and ERISA requirements for ESOPs.

Increased Demand in Anticipation of the 2026 Tax Sunset

A significant driver of business valuations is the federal estate and lifetime gift tax exemption. Currently, the lifetime exemption is $13.61 million (doubled for couples making joint gifts). However, this exemption is set to decline sharply due to the provisions of the Tax Cuts and Jobs Act of 2017, which will be sunset on December 31, 2025. At that time, the lifetime exemption will decrease to an estimated $7 million per individual taxpayer. The sunsetting provisions are poised to increase the demand for business valuation services, especially for multi-generational family businesses valued in excess of the lifetime exemption.

Maximizing Tax Benefits

Valuation services are essential for maximizing the tax benefits of tax-free transfers for company interests valued above the lifetime exemption. The US Tax Court, the IRS, and the valuation community recognize that privately-held company interests are subject to discounts for lack of control (minority interest ownership) and lack of marketability (diminished liquidity). These discounts reflect the lower trading values of privately-held interests compared to marketable securities due to factors like risk, holding periods, and transaction costs. Applying these discounts in a qualified business appraisal can result in significant tax benefits for transfers exceeding the lifetime exemption.

Broader Application of Discounts

Application of lack of control and lack of marketability discounts is not exclusive to operating businesses. Other entities, such as limited liability companies and family limited partnerships (FLPs) holding various assets (e.g., marketable securities, privately-held equity investments, etc.), may also warrant discounts, often resulting in tax benefits.

Navigating Complex Requirements

Structuring transfers that require business valuation services can be intricate. Taxpayers should seek advice from their CPAs, financial advisors, accredited appraisers, and other experts to ensure they comply with federal and state tax laws. Engaging a qualified, accredited appraiser who meets the IRS’s education, certification, and experience standards will help ensure compliance with these laws.

Understanding whether you need a business valuation is more than just a matter of assessing worth – it’s about making strategic decisions that align with your financial and legal goals. As tax laws and financial regulations evolve, the role of valuations becomes increasingly important. By consulting with experienced professionals and staying informed about potential changes, you can leverage business valuations to enhance your financial strategy and protect your interests.