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April 2023


Practical Applications of Business Valuations for Estate Planning Purposes

Most business owners pay close attention to the taxes that are assessed on gross revenue, taxable income, and payroll. A more significant tax is lurking as the profitability and stability of the closely-held business is established. Over time this tax liability may become so significant as to alter the ability of the business owner to transfer the business to the "next generation." This tax is the estate tax. And, unlike most other taxes that are assessed on the economic results of operations, the estate tax is based on the value of the company as a whole.

Estate taxes are due in a relatively short period of time. Most small businesses are "for sale" for more than a year. Yet, estate taxes are due in a matter of months from the date of death of the business owner. To the extent the business is the most significant, or only, asset in the estate, liquidating that asset to pay the taxes can cause a huge economic loss through a "fire sale" of an asset that otherwise would sell for much more.

Unintended Consequences

Another significant issue in estate planning is the attempt by most to "equalize" the estate among children. Consider this example: An estate consists of a business, a personal residence, marketable securities and cash. There are three children and the estate documents state that one sibling is to get the business, another the home, and the rest of the estate to the third sibling with a cash payment made to equalize the estate value. It sounds simple - the estate is split equally among the three children. This is a very common scenario. It may make a lot of sense when the planning documents are established.

However, the practical result is often quite complex and problematic. One possibility is that the cash and marketable securities are depleted by professional fees and taxes. That leaves two siblings with valuable but illiquid assets. Another possibility is that the sibling with the business has the asset that is substantially more valuable than any of the other assets but is the least marketable. Since there is insufficient cash in the estate and/or the business, the only practical solution is to split up the ownership of the business to equalize the estate. This raises considerations of management control and profit allocation among the siblings. Valuing the partial interests becomes a difficult and cumbersome process.

Five Key Steps

The above illustrates some of the complexities involved in owning a small business at the time of death. The challenge is not just estate taxes but also succession of ownership in such a way that the business is not disrupted. The following are five key steps to consider when preparing a comprehensive estate plan involving a closely-held business.


Service Profile:

Forensic Accounting Services for Embezzlement and Fraud

Increasingly, businesses are being victimized by embezzlement and fraud, which are serious and costly crimes. Arxis Financial's forensic and fraud accountants assist in determining the extent of monetary loss or damages and who committed the fraud.

A detailed fraud examination can uncover a dizzying maze of transactions, documents and stonewalling. Forensic experts use a variety of techniques to detect fraud and trace misappropriated cash. By scouring the company's financial ledgers and supporting documents, a Certified Fraud Examiner can help unravel the web of fraudulent transactions. For example, the investigator may review or reconcile the company's bank accounts, identify payees, track electronic transfers and payments through the company's general ledger, and scrutinize documents supporting check disbursement, such as vendor invoices and expense authorizations.

Our forensic and fraud accountants serve a critical role in both plaintiff and defense matters. We have extensive experience in determining the necessary documentation, discovery approaches, and management of these documents. We then evaluate, analyze, summarize, and present the evidence. In conjunction with Arxis Financial's experts, the attorney can assess whether fraud occurred, the legal and financial viability of the case, and the best litigation strategy.

If you have any questions about Forensic Accounting Services for Embezzlement and Fraud, please feel free to contact us.


Upcoming Speaking Engagements for Chris Hamilton

Chris Hamilton's upcoming presentations include:

  • "Valuation Fundamentals, Techniques, and Theory" 3 days, Salt Lake City (May)
  • "Ethics, Morality, and the Law" Ronald Reagan Library (June)

If you are interested in asking Mr. Hamilton to speak at your organization's upcoming meeting, please feel free to contact him.


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Chris Hamilton, CPA, CFE, CVA

Chris Hamilton,
(805) 342-0749

ARXIS Financial

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