Situation
Two owners of commercial property in Connecticut had set up a real estate holding company comprised of multiple commercial properties. When one of the owners passed away, the estate needed a valuation of his 50% ownership of the real estate holding company to settle the estate.
An owner of commercial property in the same town referred them to Lou Pereira, President of Merrimack Business Appraisers.
Merrimack Business Appraisers’ Approach
As is common, the family’s trust and estate attorney knew exactly the steps needed to settle the estate including first securing real estate appraisals of the commercial properties held in the real estate holding company. Note, this holding company had been formed as an S Corp, but the process and valuation process applies for any legal entity, such as LLC, or C Corp.
With the real estate appraisals completed, Pereira could move forward on his valuation of the real estate holding company to incorporate the appraisals as well as other assets on the balance sheet including equipment owned by the entity and accounts for rent collection and investment accounts. Liabilities included any outstanding debt. Pereira completed the valuation of the real estate holding company to then value each owner’s 50% fractional share. As is standard practice, adjustments are then made for lack of control and marketability. As is customary and compliant with IRS review standards, Pereira infers lack of control adjustments for each 50% ownership as neither party has control. Studies are available and leveraged to apply adjustments based on ownership percentages, in this case evenly split at 50%.
The final adjustments for lack of control and marketability were applied and documented to completed the business valuation of each owner’s fractional share.
Valuation Outcome
The business valuation for 50% ownership of the real estate holding company was completed along with detailed documentation of ‘how’ and ‘why’ the valuation was determined to enable the estate to be settled, reflecting the fractional ownership of the real estate holding entity.
When Values Matter.
Situation
This multigenerational family business grew hay and sold it throughout the country. The owners had more than 600 acres of land and rented additional land to grow their hay crop to feed horses and cattle.
The owners were working with a trust and estate attorney and a big unknown was the value of the farm. The owners, a husband and wife team, had purchased the farm from his father and now had two children working in the business. Their estate planner encouraged the owners to get a valuation of the farm to finalize their estate plan.
The owners intended to gift shares of the business to their children working in the business and were interested in the children having ‘skin in the game’ by investing in the farm and purchasing shares.
Their estate attorney had worked with Lou Pereira, President of Merrimack Business Appraisers previously and recommended they hire Pereira to develop the valuation of the farm.
Merrimack Business Appraisers’ Approach
Pereira has vast experience in preparing thorough business valuations for a wide variety of needs, including calculating the value of shares of the business to be gifted commonly to family members.
Pereira follows his proven, methodical process to prepare any business valuation as the process does not change based on the industry. While many prospective clients assume a business appraiser needs relevant industry expertise, Pereira reminds them that experience and knowledge is more important than industry expertise. But, given Pereira’s vast background and track record, Pereira has prepared business valuations for agricultural businesses during his career.
Pereira developed the valuation of the hay farm accounting for the variability of earnings in their history given the businesses revenue is highly affected by the weather. Growing hay and successfully harvesting the hay is highly susceptible to the weather, particularly if it rains at highly sensitive times in the process. This can be the case for many agricultural businesses so in such situations, Pereira normalizes the revenue variability by incorporating a longer time frame of revenue streams in the earnings analysis.
Valuation Outcome
Pereira completed the valuation of the hay farm located in Connecticut. This missing element was important for the trust and estate attorney to further the planning, including working with the owners to gift shares of the family farm to the next generation. The valuation of the hay farm also enabled the owners to offer family members the opportunity to buy shares of the business with the share value now determined.
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Situation
A woman was settling the estate of her late husband and in the process was referred to Merrimack Business Appraisers and Lou Pereira as a business valuation was needed to value a portion of the estate.
Merrimack Business Appraisers’ Approach
The situation was unique in that the spouse who had passed away had in place with his employer, a college, multiple contracts giving him the full rights to three textbooks he had written and four online courses he had developed and taught. Each book and course represented an intellectual property rights contract that need to be valued as part of valuation of the estate.
When he passed, the school wanted to continue to offer the courses, but per the contracts they did not have the rights of ownership. They needed to buy out the estate.
While Pereira has prepared hundreds if not thousands of business valuations in his career, this was a unique situation. There were multiple factors to account for in developing the valuation of the estate’s assets (the textbooks and courses) including capturing past enrollment in the courses and projecting future enrollment. Pereira had to take into account that the popularity of the courses would be affected over time by the author no longer being able to deliver the courses and the courses becoming less relevant over time.
Valuation Outcome
The business valuation of each of the intellectual property rights contracts was completed, enabling the college to buy out the estate and gain ownership, and have the right to offer the materials.
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Situation
A fractional owner of a light manufacturing company in Massachusetts passed away. The CPA referred the family to Lou Pereira at Merrimack Business Appraisers to complete valuations of the fractional shares of the business for settlement of the estate.
The light manufacturing company was owned by one group and a separate entity owned the real estate on which the company operated.
Merrimack Business Appraisers’ Approach
Business valuations were needed for both entities, the light manufacturing company and the real estate holding company, to then define valuation of the fractional shares in each to settle the estate.
Pereira developed a thorough business valuation that reflected the valuation of the manufacturing company and the value of the real estate holding company. An appraisal of the real estate was prepared separately by a real estate professional and then incorporated into developing the valuation of the real estate and then determining fractional share interests in each entity.
Valuation Outcome
Business appraisals for the operating company and the real estate holding company were completed, with supporting documentation of how and why the valuations were determined and how the deceased’s value of fractional ownership was attained. The final business valuation reports enabled the settlement of the estate.
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Situation
Two business owners were selling their interests in a business and had in place a strategy to minimize tax liability and contributing significant proceeds from the sale to charities. One of the sellers hired Lou Pereira, President of Merrimack Business Appraisers, to ensure he had a business valuation professional who understood the complexities of such a transaction and could advise on the important timing sequence to achieve his goals of a tax deduction for the charitable donation.
At first glance, the business valuation work to value the owner’s interest in the business being sold while donating a percentage of the shares to charity may seem quite straightforward: value the shares, allocate some of the shares that will be donated to the charity. The buyer buys the defined percentage from the seller and buys the defined percentage of shares from the charity. Deal is done and tax strategies and charitable donations for the seller are achieved. The reality is there are important nuances that are critical to understand and execute correctly or the seller’s tax deduction goals will not be achieved.
If the sequencing of the associated transactions are not sufficiently spaced out, the IRS may disallow the charitable donation as part of the sale of the business.
Merrimack Business Appraisers’ Approach
As one of fewer than 12 Certified Business Appraisers in New England, Lou Pereira has the expertise to fully understand the business valuation calculation of the shares for charity as well as knowing the specific IRS requirements related to charitable contributions. The valuation of the business, the associated shares donated to charity, and the timing of the transactions were completed and executed in a manner to ensure the intended goals were achieved.
Valuation Outcome
The result was the seller secured the desired tax deduction, significantly reduced his tax liability, and accomplished his goal of making a substantial donation to a charity of his choice.
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Situation
An elderly man passed away and his estate needed to be settled. The man had been an active entrepreneur and led the management of ten businesses in related industries. A CPA who had been involved in some of the accounting work for the businesses contacted Lou Pereira, President of Merrimack Business Appraisers, to participate in the vetting process of selecting a business valuation expert.
Six attorneys led the evaluation to select a business valuations professional for this complex valuation need. Some of the ten businesses had different and multiple business partners. Financial statements and tax returns were inconsistent and incomplete and would require careful analysis and adjustment for each of the business entities to calculate total valuation and ownership interest to settle the estate. The attorneys, the decision makers in selecting the business valuation expert, conducted interviews to assess business valuation professionals and their track record, process, and relevant industry experience.
The vetting process concluded and Lou Pereira was hired.
Merrimack Business Appraisers’ Approach
- Lou Pereira methodically and thoroughly analyzed and adjusted the financial statements for each of the ten businesses, removing incorrect data and accounting for missing information over the years, based on available information.
- The information gathering process included interviewing current employees.
- The valuation of each business was determined and documented to then determine ownership interests including the decedent’s valuation based on shares.
Valuation Outcome
The valuation of the decedent’s interests in each of the ten businesses was determined to then settle the estate.
When Values Matter, contact a proven and certified business appraiser.
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Situation
A business valuation was needed for tax filings to settle an estate where one fractional owner of an LLC had passed away. The LLC owned the lease for the mineral rights on a one-acre lot in North Dakota.
Merrimack Business Appraisers’ Approach
- Lou Pereira, President of Merrimack Business Appraisers, secured the expertise of an engineer to calculate the quantity of minerals, in this case oil and gas, that could be extracted from the North Dakota property.
- Lou developed the valuation to include forecasted future prices of oil and gas; then applied the discounted cash flow method.
- A thorough and detailed valuation of the business and the value of the fractional ownership was completed for settlement of the estate.
Valuation Outcome
Without the proper engineering and business valuation expertise, the business valuation of the fractional ownership of an LLC that included owning just the lease for the mineral rights on a one-acre lot in North Dakota could have been dramatically more, incurring greater tax consequences.
When it comes to business valuations, having a certified valuation professional who offers a proven process matters.
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Situation
Multiple partners owned a business that was organized into several entities. They had a sale pending with a strategic acquirer. One owner sought to donate shares to a charitable organization, and he needed expertise to plan for the sale transaction while achieving his goals, and also while complying with IRS requirements.
Merrimack Business Appraisers’ Approach
Lou Pereira’s specialties include preparing business valuations involving fractional ownership interests and complying with IRS requirements.
For the individual entities and the overall entity, Pereira prepared the business valuation, which included determining the fractional valuation for this owner and the dollar value of the charitable donation to be made. Pereira calculated the number of shares that would be donated to the charity, and then the strategic buyer would purchase those shares as part of the sale of the business.
Time was of the essence because there was a deal pending. Pereira worked diligently to ensure that the valuation was completed on the necessary schedule to close the deal.
Valuation Outcome
The sale of the business was completed without delay and the owner’s charitable contribution complied with IRS requirements.
Situation
Experiencing hypergrowth of 170% in three years, a large, privately-owned group dental practice and Dental Support Organization (DSO) on the west coast was using stock grants to attract and compensate new professional executive managers. The company and a newly-hired officer needed a business valuation of the stock for IRS Section 409A compliance.
Merrimack Business Appraisers’ Approach
Lou Pereira’s methodical and thorough valuation included quantitative and qualitative analysis. By applying an income approach using a discounted cash flow method, he was able to fully explain and substantiate the value determination. In addition, providing a market perspective, with transactions of other high-growth acquisition targets, further supported the valuation. This comprehensive approach was important to ensure that the company would meet the IRS’s stringent requirements for compliance with Section 409A.
Valuation Outcome
Compliance with IRS Section 409A was attained and tax liability for the company was reduced.
Situation
A specialty technical services consulting company was in the process of being sold to another company, but the deal structure threatened its viability. As a C-corporation pursuing an asset-based sale, the eight selling owners faced significant tax liability in the form of double taxation — at the corporate income level and at the shareholder dividend level.
Merrimack Business Appraisers’ Approach
Lou Pereira conducted a complete valuation of the company to determine fair market value, as well as the total amount of goodwill. Through detailed and thorough analysis of each owner’s role and responsibilities, the amount of each individual’s personal goodwill was determined. This involved developing a complex, multi-attribute allocation model incorporating each owner’s level of client contact, total work hours, and billable hours.
Valuation Outcome
As a result of the valuation, analysis, and modeling work, the sale was restructured to allocate part of the purchase price as personal goodwill. This enabled the assets of the corporation and personal goodwill of each individual owner to be sold separately. Avoiding any double taxation.
