Summary of Issue

Attorneys representing several beneficiary groups called Arxis, requesting a review of a business valuation report. This is different than an opinion of value in that Arxis’ job was to evaluate the report to express confidence or concern with the methodologies and conclusions of the report.  Arxis was not retained to value the business.

Why the Request?

The valuation report was to be the basis of assessing estate taxes as well as distribution of assets from a large estate. The business was just one of several assets in the estate. There was significant concern among the beneficiaries and attorneys that the value was wrong. The specific concern was that the Trustee had accepted the reported value as accurate and was proceeding accordingly.

The Valuation Report

The valuation was done for a single-asset company that should have been immediately recognized and identified as a holding company. The business appraiser had been hired to value the equity interest (less than 100%) of the estate in the subject business. The only asset on the balance sheet of the subject company was an 80% interest in an operating company. The methodology of valuation was based solely on the activity in the operating company and, for all purposes, the single-asset (holding) company was ignored. Therefore, 80% of the value conclusion of the subsidiary multiplied by the equity ownership interest percentage of the estate in the holding company was the reported value.

Arxis Analysis

Unfortunately, the beneficiaries and attorneys were correct in their apprehension. The effect of the valuation report was to opine on the value a balance sheet item (investment in the operating company) but did not, in fact, value the equity of the holding company. The valuation report under review failed on several basic aspects:

  • The valuation report should have included the valuation of two companies – the subsidiary and the holding company.
  • The business appraiser applied a marketability discount for the subsidiary but not the holding company with no explanation as to why that would be reasonable.
  • The business appraiser failed to consider trapped-in capital gains, or any other liabilities associated with the investment in the subsidiary.
  • In valuing the subsidiary, an income approach was used by the appraiser. The appraiser used an equity risk rate to value an invested capital cash flow.

There were several other errors of a technical nature. However, the above concerns were so fundamental to business valuation that there was no need to document other errors. The report was unusable.


In a conference with all parties it was disclosed that the valuation report was not reliable and that, at minimum, the reported value was more than double the actual value of the equity interest in the holding company. Thousands of dollars were spent on a valuation that would have resulted in skewed distributions and the material overpayment of estate taxes. The beneficiaries asked if the IRS would question the report if it was submitted with the estate tax return. The simple answer to that was no – the IRS would hardly challenge the valuation conclusion that resulted in double the estate tax paid than should have been!

Business valuation reports can look impressive and complicated. But, if the conclusions feel wrong, it may be worthwhile to get a second opinion, and that is possible to do so without paying for a new valuation report. A “Valuation Report Review” is a relatively inexpensive way to get that second opinion.