Valuation & Litigation Advisory Blog

There have been a series of recent economic, tax, and business valuation developments that give incentive for business owners to accelerate their consideration of the issue of succession planning. As most business owners are already aware, there can be significant adverse tax implications of shifting wealth to the next generation if the proper succession plan is not in place. However, the current environment offers a great opportunity for individuals to minimize the tax liability associated with this effort. 

First, as we are all well aware, the current economic environment is creating significantly depressed values in business investments. Just take a look at your 401(k) balance if you need evidence. The same is true for closely held businesses, which are experiencing weakened revenue and profitability levels. Therefore, as part of the wealth shifting process, business owners have the opportunity to transfer the ownership of a business interest that may be worth significantly less now than it was just one year ago. A diluted value of the business interest also results in a diminished tax liability, which, of course, is great news for the business owner.

Second, there are estate tax rules, either already in place or currently under consideration, that impact the succession planning effort. For example, the estate and generation-skipping exemption amount was recently increased to $3.5 million for 2009. While we would not expect this exemption to return to earlier levels ($2 million) anytime soon, this is certainly an incentive to further consider the acceleration of the implementation of a succession plan. 

In addition, there has been much talk in Congress about restricting or elimination the use of valuation discounts in estate and gift tax valuations. Valuation discounts have long been a controversial subject within the tax courts and the valuation community. Very recently, HR 436 (“Certain Estate Tax Relief Act of 2009”) was introduced. This proposal contemplates curtailing the use of “lack of marketability” discount on certain business interests. While the details of the circumstances under which this discount might be allowed or disallowed in the future cannot be predicted at this time, what is clear is this: if the lack of marketability discount is eliminated, it can have a significant adverse impact on a taxpayer’s estate or gift tax liability. The AICPA recently commented that this sort of estate tax reform will have an adverse impact on small businesses. 

In addition to the fact that it is just a smart business and personal decision to work with your advisors to design and implement a succession plan, all of the reasons outlined above give incentive to those on the fence about shifting wealth via business ownership interests. This concept does not exist in a vacuum, however.  Tax liability is not the only factor that must be considered when setting up and implementing a succession plan. Other factors, such as family relationships, health of the business, and competitive landscape must be contemplated before undertaking any effort to transfer ownership in a business.

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.