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Year-End Gifting: Using Business Valuation to Realize Tax-Saving Estate Planning


Heilich_DaveLearn how a business valuation can identify the fair market value of your business and guide gifting decisions to maximize tax-saving opportunities. Cathy Roper, Director—Financial Advisory Services and David Heilich, Family Wealth Planning Practice Leader—Tax Services, discuss the benefits of a business valuation and how knowing the actual business value can determine appropriate gifting amounts to maximize estate planning.

Knowing the value of your business is important for making wise gifting decisions, especially because there could be quite a difference between an organization’s perceived value and its actual value.

“Business owners really should know how much their business is worth so they can determine whether or not to make a gift, and to ensure the amount of the gift is appropriate for their estate plan,” says David Heilich, family wealth planning practice leader at Brown Smith Wallace LLC, St. Louis, Mo.

As a result of the recent recession, lower fair market values have made gifting a much more attractive option, giving business owners the opportunity to leverage closely held stock and partnership/LLC interests, especially when applicable discounts for lack of marketability and lack of control (the so-called minority shareholder discount) further decrease the amount potentially subject to taxes.

At the same time, doing a business valuation sooner rather than later — meaning years before a possible ownership change — can potentially add to the future value of the business when an eventual sale to an outside party is planned.

“Now is a great time to discuss with a professional how to take advantage of estate planning opportunities,” says Cathy Roper, director of financial advisory services, Brown Smith Wallace.

Smart Business spoke with Heilich and Roper about year-end gifting and the benefits of a business valuation.

What year-end gifting opportunities make this an attractive time of year to be generous?

Currently, there is a $5 million gift exemption, which is significantly higher than ever before, and, under the current law, in 2013, the estate, gift and generation-skipping tax (GST) exemptions decrease to $1 million, with the GST exemption indexed for inflation. In 2011 and 2012, single individuals with net worth of at least $5 million, and married couples with net worth of at least $10 million should consider making outright gifts and/or executing various estate planning techniques.

Advisers should take into account the nature of the assets being gifted and projected future values to determine if gifting makes sense and to avoid gifting too much.

How should an individual plan this year, considering the uncertainty of gift laws in 2013 and beyond?

It is unknown when the law in 2013 and future years will be settled, and if there will be any changes to the current law. You don’t want to be paralyzed by the uncertainty of the future. The opportunities in 2011 and 2012 could be lost if you wait until there is better guidance on the current and future estate and gift tax laws.

There are a lot of creative estate and gift tax planning opportunities that provide options and flexibility. Consult with a team of qualified professionals and take into account all relevant factors in order to make an educated decision about whether now is the time to take advantage of gifting opportunities.

How can getting a business valuation years before an ownership change is planned potentially add to the future value of a business?

A business valuation is an opportunity to do a ‘wellness’ check of your business and provides you with the type of dispassionate view a potential buyer will have. The valuation analyst will tell you where your company ranks compared to the industry on a number of different measures such as days outstanding on receivables, capital expenditures as a percentage of sales, gross profit margins, etc., and suggest areas where efficiency and, thus, profitability, can be increased.

Here’s an example: In a recent due diligence engagement in which we were evaluating a software business for a potential investor, we recommended switching from a traditional development model in which a client purchases the software and upgrades as new versions come out to a software-as-a-service model in which the software is leased and the continuous monthly lease payments smooth out the revenue stream and cash flow. This reduces the need for interim financing, reduces income variability and stabilizes the customer base, which reduces risk for a potential buyer. The less risk an investor has, the safer the investment is and the more an investor is willing to pay, or, put another way, predictable cash flow is always more valuable.

What is involved in the process of getting a business valuation?

The process is fairly straightforward, but often takes four to six weeks. First, you will receive a document request list that requires gathering at least five years’ worth of financials on an accrual basis, along with the most current financials. These are reviewed, and your ratios are compared to the industry average.

Once the valuation analyst gets a feel for the industry’s outlook and how the company compares to the industry, he or she will schedule an on-site visit in which owners are interviewed and questions are asked to further assess the company relative to the industry and to its competitors. Documents reviewed may include corporate charters, partnership agreements, minutes and any previous offers to buy the company.

Is it too late to begin the gift planning and valuation processes after the New Year?

Not at all. 2011 is an opportune time to take advantage of gifting opportunities, and a valuation is important to make wise decisions. Under current law, the gift exemption continues through 2012, so the New Year will still provide opportunities to continue estate planning and reap benefits from current estate, gift and GST exemptions. <<

DAVID HEILICH is family wealth planning practice leader at Brown Smith Wallace. Reach him at (314) 983-1273 or dheilich@

Kristen Hampshire of Smart Business Magazine conducted this interview.

© 2011 Smart Business Network Inc. Reprinted from the December 2011 issue of Smart Business St. Louis.

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