Passing down a family-owned business is one of the most significant financial decisions an owner will make. A well-executed valuation is necessary for estate planning, gifting, and tax compliance, making it a key step in preserving generational wealth.
The Internal Revenue Service (IRS) requires a qualified business appraisal for estate and gift tax filings. Without one, families risk audits and financial repercussions.
Why a Business Valuation Matters and the Risks of Getting It Wrong
Transferring a business to the next generation involves more than just signing over ownership. A well-documented valuation meets compliance requirements, reduces family conflicts, and helps avoid unnecessary tax liabilities. Miscalculating value can lead to overpayment or underpayment of estate and gift taxes, impacting family wealth.
Failing to conduct a proper valuation can have serious consequences:
Common Business Valuation Mistakes to Avoid
Failure to Act
After an appraisal, families must transfer ownership according to the estate plan. Delaying action can result in the senior generation passing away with a controlling ownership stake, preventing their heirs from accessing tax-saving valuation discounts.
Miscalculating Valuation Discounts
Estate planning often involves transferring minority interests—shares that lack control over business operations. The IRS allows discounts for:
Failing to apply these discounts appropriately can lead to overvaluation, causing families to pay more in taxes than necessary.
Mixing Personal and Business Expenses
It is not unusual for business owners to pay personal expenses through the family business. However, for an accurate valuation, these items must be removed from the profit and loss statement to present the company’s actual earnings. Other common adjustments to earnings are for family member compensation, rent (if the company leases real property from a related entity), and other related party transactions, such as loans.
Poor Financial Record-Keeping
Many closely held businesses lack sophisticated accounting systems, making it difficult to extract the correct financial data. Poor record-keeping can:
A professional accounting team helps companies organize financial records and improve transparency, resulting in a more reliable appraisal.
The Business Valuation Process
At Elliott Davis, our structured appraisal process supports consistency and compliance. Here’s how our approach works:
Step 1: Gathering Financial Information
Step 2: Aligning Legal & Tax Strategies
Step 3: Management Interviews & Business Analysis
Step 4: Inputting Data into Valuation Models
Step 5: Drafting the Valuation Report
Pro Tips to Achieve a Proper Business Valuation
We Can Help
At Elliott Davis, our certified appraisers provide IRS-compliant, defensible valuations for family-owned businesses and high-net-worth families, in alignment with their estate planning goals.
Contact us today to schedule a consultation.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.