One of the integral parts of any business succession plan is hiring an appraiser to value the closely-held company. In determining the value of the company’s ownership interest, the company’s net worth, earning power and distributions are taken into account. Moreover, after these factors are taken into account, the ownership interest may be discounted (i.e., its value for tax purposes is reduced) for a number of reasons, such as lack of marketability or lack of control (“minority discount”).
Hiring a qualified appraiser can help you assess the validity of your own determination of investment value, i.e., the return on your investment in the closely-held business, and help you structure a transfer arrangement. You may also need an independent appraisal to obtain financing or to provide documentation to support any valuation. Where the valuation of an ownership interest in a closely-held company is relevant to the correctness of a tax return, the taxpayer must submit with the return complete financial data on which the valuation is based, including copies of reports of any examination made by accountants, engineers, or technical experts, as of, or near, the valuation date.
Thus, the appraiser’s report can provide both financial and tax substantiation. Furthermore, should the valuation issue become the subject of litigation with IRS, the appraiser’s expert testimony can be the best way of presenting the factors used to value closely-held company ownership interest. In fact, it would appear that the taxpayer can even shift the burden of proof to IRS on the valuation issue if the appraiser’s testimony provides credible evidence.
Caution is appropriate in reviewing an expert’s qualifications. The general standard applied to the admissibility of an expert’s opinion is whether that testimony would assist the trier of fact in deciding the case. If an appraiser’s techniques, experience or qualifications are found unreliable and irrelevant, a district court or Tax Court judge may find that the expert’s testimony does not meet the admissibility standards of Federal Rule of Evidence 702 and, thus, the testimony will not be evidence in the case.
To save time and money, it may make sense to find an appraiser who can provide both asset appraisals and business valuation. In any case, you should check the appraiser’s references, experience, and credentials. In that regard, you need to determine whether the appraiser has been certified or accredited by the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), the National Association of Certified Valuation Analysts (NACVA), or the American Institute of Certified Public Accountants (AICPA).
You should also ask whether your appraiser is familiar with the widely recognized professional standards for appraisers. The Uniform Standards of Professional Appraisal Practice (USPAP) and the Principles of Appraisal Practice and Code of Ethics (PAPCE) establish authoritative principles and a code of professional ethics for appraisers. In addition, the Business Valuation Standards (BVS) of the American Society of Appraisers supplement and clarify the USPAP and the PAPCE with respect to the valuation of businesses, business ownership interests, and securities.
You should also select an appraiser who has actual practical experience in buying or selling businesses. Moreover, it would be a good idea to inquire whether the appraiser has experience testifying as an expert witness to establish valuation and whether the appraiser has represented both taxpayers and IRS. The fact that an appraiser has provided expert testimony on behalf of taxpayers and IRS can add to the appraiser’s credibility should you someday need his testimony to establish valuation.
For each of the foregoing reasons, it is essential that you select an appraiser whose qualification, experience and analysis are beyond reproach. If you have any additional questions or need assistance in finding and working with a qualified appraiser the attorneys at Burr & Forman are here to help.