A Valuation of Mineral Rights in North Dakota

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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Business Valuation Ensured Compliance with Charitable Contribution Requirements (IRS)

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.

Substantiated Reduced Tax Liability

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.

Avoiding Double Taxation in Asset-Based Sale

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.   

Personal Goodwill Allocation for Tax

Situation

The service business, valued at $1.1 million, was an asset sale of a C Corporation and the seller was at risk of significant double taxation on the proceeds. Based on the highly thorough and accurate company valuation done previously for the sale of this business, Merrimack Business Appraisers President Lou Pereira was retained as the certified business appraiser for business valuation services for the tax filing.

Merrimack Business Appraisers’ Approach

Lou Pereira’s comprehensive and detailed business valuation report clearly identified and separated the personal goodwill of the seller, which significantly reduced his tax liability. He applied a multi-variable analysis that qualified and quantified the amount of personal goodwill.

Valuation Outcome

As a result of the company valuation, the seller saved approximately $216,000 in taxes.