From Transitions and Traditions, Cohn Financial Group, 800 468-9667: Think about selling when

1. The business is no longer fun

2. You are faced with the need to make huge capital expenditures to avoid becoming technologically obsolete

3. Your kids are already burned out and are more interested in selling than you are.

4. You think of your equity in the business as a high risk investment and you can receive better returns elsewhere at lower risk by selling out

5. Things are going well but you dread the next cyclical downturn

6. You believe the competition will eat you alive shortly

7. Your children show no business leadership, aren't in the business, have no capital, etc.

8. You wish you could spend more time doing something else.

9. There is no clear management succession or developmental plan

Consider holding on when:

1. You ARE having fun

2. You see acquisition opportunities for your business and have the resources and energy to pull them off.

3. You'd like to pass on the business to future generations and they are willing and capable

5. There are no opportunities to integrate vertically or horizontally into a large company.

BUSINESS VALUATIONS and TRANSFERS: (1996) Business owners can have a substantial amount of their estate tied up in the business which can be taxed at full value upon death. As regards the valuation, an owner essentially cannot put his own value of the business since it will not be accepted by the IRS. And letting the IRS do it is stupid. So literally all texts suggest the owner hire an independent and QUALIFIED business appraiser.

Also if there are separate business interests, certain minority and lack of marketability discounts may apply.

A lack of marketability discount applies typically to a closely held business- such as family business for example- since their stock is not actively traded on an exchange. Therefore a seller's value is reduced due to the difficulty in finding a ready and willing buyer to purchase the business.

Minority discounts are valid for transactions where a controlling interest- more than 50% ownership- has not passed to another party. As an example, if a shareholder gives/sells his 25% of XYZ company to another, a minority discount could be taken since a 25% interest is not enough for full control of a company. By the same token, passing 51% interest could actually have a premium attached since a controlling interest was given. Discounts may even be taken when transfers are made to a controlling shareholder. In a Private Letter Ruling 94-32001 a father owned 49% interest in a family business. At death he transferred the total interest to his son who already owned the other 51%. Of course, one's immediate reaction would be to price the father's interest at full value since it went to his son. But the father's interest was actually allowed a minority discount since it was valued at what a willing buyer would pay for the noncontrolling interest. The valuation was not impacted by the relationship to the recipient nor by the amount of control experienced by the recipient after the transfer.

Another ruling applied a slightly different position. In this case, a father took his 100% interest and gave 30% to each of three children, 5% to his wife and kept 5% for himself. He attempted a 75% marketability discount of 75% of the fair market value of the gifts. But the IRS came back and said that if one child aligned with another for a total of 30%, they would have a swing vote and therefore denied part of the discount. In a separate case where each of the children received 20%, the IRS said a swing vote does not apply since two children joining together would not have enough to control the business.

BUSINESS TRANSFERS, IMPENDING DEATH and ANNUITIES: In a related case to that above, a mother held 60% ownership in a business, one child held 20% and two other children held 10% each. In contemplation of an impending death, mother sold one half her interest- 30%- to the 20% child for a private lifetime annuity. The other 30% of her interest was redeemed by the company. This effectively left the child with a 70% interest in the company- far more than a simple controlling interest. Mother tried to get a minority discount both to the stock gifted to that child as well as the 30% that was sold/redeemed by the company. The IRS determined that the transfer and sale effectively was one transaction with the child essentially being transferred a controlling interest in the company. The valuation was therefore INCREASED rather than decreased.

Secondly was a separate issue of the valuation of the annuity. These are valued by the actuarial expected age of the annuitant. But the point here was if the life expectancy can be reasonably determined to be shorter, then the shorter time frame will used in the valuation. Since Mom was expected to die soon, the government tables overstated the value of the annuity and therefore Mom sold her interest to her child for less than the fair market value- a "bargain sale". The IRS therefore deems the bargain sale element to be a gift which is subject to gift taxes. O.K., so some of this was a little involved. But what should have been clear is that Mom absolutely should have done her estate planning much much earlier. She should have used an estate expert. She could have avoided almost all the hassles with the IRS.

NOTE: some say that the life expectancy of an ill person is not an issue for private annuities and can therefore be used to provide large amount of assets without intervention by the IRS. Unless you have a private letter ruling, I suggest being careful.


1. Do you have formal plans for the distribution of your business in the event of your death or disability?

2. Have you chosen your successor and are the succession arrangements clear cut

3. If you do have a succession plan, have you carefully considered the plan's tax implications. Can your business withstand the tax payout

4. Have you arranged for an adequate buy-sell agreement with your successor so that the business can change hands smoothly

5. Will your key employees (and your work force at large) be threatened in the event of your death. Will they remain with the company. Are their pensions safe

6. Are all the elements of your succession plan coordinated to provide maximum benefit to the business when the transition occurs. For example, do stock compensation arrangements dovetail with deferred compensation and buy-sell agreements

7. Is your attorney, accountant and your business adviser working together with an eye to successful business continuity

8. Assuming that one of your children is chosen to succeed you, is the rest of the family aware of your selection. Do your testamentary documents provide for equal distribution to those that not in the business.

9. Are the lending institutions with which you deal aware of your succession plan. Do they have as much faith in your successor as they have in you.

10. Have you reviewed your succession plan in light of new tax provisions.


CLOSELY HELD BUSINESS: (FW) Value of a business must be valued at death. The IRS has determined eight factors to be take into considerations by an appraiser. These are valid for partnerships and sole proprietorships as well.

1. What does the company do? Is it involved in the sale of goods and services. Have sales been increasing or decreasing? Are product lines diversified or offer only one? What kind of inventories, equipment and facilities does it have?

2. What is the economic outlook in general and the outlook of the particular industry of this company? Is a company a leader? Is the industry/company on the cutting edge of new technology or are its products becoming obsolete?

3. What is the financial condition of the company? What is the debt ratio, working capital, long term debt, net worth?

4. What is the earning capacity of the company? This is considered by the IRS as perhaps the most major factor. What are the profit centers within the company, its major operating expenditures? Are earnings increasing or decreasing from year to year?

5. What is the dividend paying capacity? Though closely held companies rarely pay dividends since owners are substituting salaries and bonuses which are tax deductible by the company where dividends are not, if this were a publicly traded company, what dividends might be expected?

6. Does the company have any goodwill through a brand name or a record of successful operations over a long period of time?

7. Have there been any prior sales of stock? Arms length? How large is the block to be valued? Is it a majority or minority interest?

8. What is the market value of similar publicly traded stock?

Additional attention is also paid to physical location and condition of retail stores and the demographics of the local neighborhood and, particularly, the discretionary income of the consumers in the area. Are the goods perishable, what is their markup, how much is inventory turnover, what is the credit worthiness of the company and what is the relationship with suppliers?

Manufacturers are analyzed by their ability to develop and produce new products. Are they sold directly to the public or are they part of a larger system? Are the products easy and economical to transport? Are scarce raw materials needed, do there prices fluctuate widely?

Service companies are valued by their ability to generate fees and commissions. Generally the goodwill may outweigh the value of tangible assets. It is the trust and integrity that consumers value- perceived or real- that is their lifeblood. Further questions are whether it adapts well to changing markets and customer requirements, how well it provides support to its professional staff.

Finally the article notes that the death of a major player can have a serious negative effect on earnings and value- but this is not a major factor for the IRS. They are to value the assets at the time of death, not in view of subsequent events.

As you can hopefully see, the valuation and distribution of business assets is extremely complex. From my viewpoint, I think it would be ludicrous to plan for a disposition of a small business without engaging some knowledgeable advisers.

GIFTING: 1997 As you are (hopefully) aware, one may gift $10,000 to as many people as you want each year. But here's how you could actually give more. Assume you own an interest in real estate, a partnership, business- something where management is an issue. You could give away $10,000 of value and that's fine. But in many of these instances, the interest you have given away is subject to a discount because the interest is not controlling (minority interest) and also not readily saleable in the marketplace (liquidity discount). You should get some formal documentation to the effect by an outside authority (making up your own is just plain stupid) but the courts have allowed up to a 30% discount. Therefore, you could actually gift value of $14,285 since, when discounted, it equals $10,000. A married couple could therefore make a joint gift of $28, 560. Do this each year and you can significantly reduce your estate before you die. Remember, anything over $600,000 starts being taxed at 37%.