No matter what type of business you own, chances are it will need to be valued at some point.
Whether you own a manufacturing company, service business, retail business, medical practice, real estate business, or own an entity that holds assets like a family vacation home or rental property, a business valuation is important when it comes to estate planning.
Whether you're planning for wealth transfer, minimizing estate taxes, or ensuring business continuity for future generations, assessing the worth of your business ownership through a business valuation can significantly impact estate planning decision making and developing desired tax strategies.
When performing a valuation, the valuator needs to consider three primary approaches to value:
Each approach has specific methods to determine business value. The business valuation professional needs to consider all approaches and methods and use the most applicable and appropriate for the business type and set of circumstances.
The right approach depends on many factors including the nature of the business, its financial performance, and even the estate planning objectives.
The adjusted net assets method, sometimes called the adjusted balance sheet method or accumulated assets method, is a common method of valuing a business that is capital intensive, a holding company, or when a business is not profitable and an income approach is not appropriate.
It is based on the premise that the value of the equity of the business is the difference between the economic value of the business’ assets and its liabilities. This method assumes the critical components to the value of the business are its underlying assets and that the value of the underlying assets represents the value of the whole.
This method begins by identifying the business’s assets and liabilities, including off-balance sheet items. Off-balance sheet assets include intangible assets such as brands, patents, copyrights, and contracts. Off-balance sheet liabilities include unrecorded legal liabilities or off-balance sheet funding.
The business’s individual assets and liabilities are then appraised, usually under a fair market value definition of value. The value of the business equity is derived by subtracting the total adjusted liabilities from the total adjusted assets.
While this method sounds simple, it can get complex. Appraising intangible assets can get quite involved and specialty appraisers need to be involved to properly value real estate, special purpose buildings, production lines, and artwork or antiquities owned by the business. Other factors, like properly recognizing built-in gains tax liabilities, may also need to be considered.
The income approach values a business based on its earning capacity. This approach bases value on the present value of future benefits of ownership.
The capitalization of cash flow method uses a single-period projection to estimate value, while the discounted cash flow method projects multiple periods of future cash flows and discounts them to present value.
In applying either method, an appropriate discount rate and capitalization rate need to be determined. The rates need to consider many factors, including risks associated with the specific company. The income approach methods are often applicable when the subject business has generated a positive cash flow in the past and is expected to generate a positive cash flow in the future.
The market approach is based on the principle of substitution. The underlying premise of value is that the most an investor will pay for an asset is the price other investors are currently paying for identical assets in the market. This approach determines a business’ value by comparing it to similar businesses that have been sold or are publicly traded.
There are two common methods used in the market approach:
For smaller to middle-market companies, the guideline transaction method, sometimes referred to as the merger and acquisition method, is one of most utilized valuation methods. However, it can also be the most difficult to use accurately.
Comparing your house to your neighbors’ house that just sold can be an appropriate way to value your house, but adjustments still need to be made. For a business, those needed adjustments are multiplied.
No business is the same, each has their own risks, strengths, weakness, and threats. Using a metric such as the average transaction price to revenues may give a misleading indication of value if adjustments are not properly made.
Most business valuations that are for the purpose of assisting in estate planning require the valuation of a specific interest in the business, often a minority interest. A minority interest might be gifted to children, placed into a trust, gifted to a charity, or be part of a deceased’s estate.
Minority interests in a business do not usually have a fair market value that is equal to their pro-rata or proportionate value of the business as a whole. This is because minority interests usually suffer from a lack of control and a lack of marketability.
For instance, a 20% interest owner cannot control the operations of the company; it cannot set compensation, dictate when the company buys or sells assets, enter into contracts, take on debt, or distribute profits. If it is a private company, a 20% owner does not have a ready market to sell into. The minority ownership interest might also be subject to transfer restrictions or limited or no voting rights imposed by a shareholder or partnership agreement.
The IRS, courts, and the business valuation profession have accepted the notion that a minority interest in a private company has characteristics that result in the fair market value of the interest being discounted from its pro-rata value.
Imagine your neighbor's house is valued at $500,000. Would you pay $100,000 for a 20% stake if you had no say in how it was maintained, who lived there, whether it was sold, or even what color it was painted—yet you were still responsible for 20% of the property taxes?
Probably not. The risks and uncertainties of ever seeing a return on your investment would be too high. You’d only consider buying that 20% share if it came at a discount, increasing the likelihood of a worthwhile return.
Determining the appropriate discounts applicable to a minority interest in a private business due to lack of control, lack of marketability, and lack of voting rights is a critical part of a valuation that is for estate planning purposes.
A common estate planning strategy is to gift as much of a company’s ownership to children without exceeding the lifetime gift tax exemption, which in 2025 is $13.99 million or double that for a couple. If you have a business worth $100 million and gift the entire business to one child in one gift transaction you will pay gift tax on $86 million.
But if you gift a minority interest to multiple children or over multiple years you can gift ownership in the company while paying a lot less gift tax because each minority interest gifted will be subject to discounts from its pro-rata value.
Higher discounts are usually desired when gifting. Certain factors help support higher discounts, such as having a strong shareholder agreement that restricts the sale of shareholders’ interests, requiring rights of first refusal, and making some ownership non-voting interest, to name a few.
While estate planning strategies can help manage the amount of gift tax you pay, the IRS requires the value being gifted to be appraised by a qualified appraiser and well supported. Along with the value of the company as a whole, the amount of discounts applicable to a minority interest must also be supported well.
An accurate business valuation can help minimize estate taxes, as a properly valued business and business interest allows for tax-efficient ownership transfers, helping to reduce financial burdens on heirs. Valuation can also assist in equitable distribution among heirs, preventing potential conflicts and ensuring fair asset allocation.
A well-documented valuation supports a seamless transition to successors, allowing the business to thrive even after the owner's passing. Valuation also plays a vital role in facilitating wealth transfer strategies, particularly in structuring trusts or gifting shares to family members. An accurate valuation helps avoid IRS disputes, as a well-supported business valuation minimizes the risk of tax challenges and legal complications.
A well-prepared business valuation that uses the appropriate valuation method for your business’ characteristics and your future goals is a critical step in estate management. Not sure where to start? Contact SVA today.
Our knowledgeable professionals know the ins and outs of valuations and estate planning and can help you determine the right course of action.
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