The January 2005 Estate Planning magazine published by Warren, Gorham & Lamont of Thomson’s RIA Group includes an article entitled “Overcoming IRS Challenges to the Amount of Marketability Discount” by Dr. Stan Feldman, Axiom’s Chief Valuation Officer. The article describes how the Internal Revenue Service is increasingly appealing to very sophisticated peer reviewed research to establish guidelines for these discounts in general and marketability discounts in particular, and how these efforts by the IRS are changing the traditional expectations of acceptable discount levels. Caution: the IRS appears ready to challenge valuations where the discounts are greater than warranted based the research of their experts. We encourage anyone involved in estate planning to read this article. Please contact us for reprints of this article.

We have seen a number of companies that have converted from C to S corporate form, but did not have a valuation done at the time of the conversion. If the firm is sold prior to the ten year holding period, there is a tax owed on the built-in gain in value from the time of incorporation to the point of conversion. An independent valuation as of the date of the conversion is needed in order to substantiate to the IRS the calculation of the amount of the built- in gain tax. It is generally simpler and less expensive to have a valuation done at the time of the conversion than to value a firm as of several years ago. Consequently, Axiom recommends that businesses that are planning to convert from C to S have a valuation done as of the date of the change. Contact Axiom for a quote on the cost of these valuations.

Axiom has recently developed a product-line specific valuation model for financial planning firms for a nationally recognized financial services provider. The valuations are being used for buy-sell agreements among the principals and for providing a framework for buyers and sellers of financial planning practices to determine what the practice is worth. The valuation model includes a number of firm-specific factors that are set to reflect the product-line mix growth and risk factors, and can easily be adjusted to consider alternative assumptions. Not surprisingly, certain product lines of these practices are worth far more than others. This approach provides a more realistic basis for determining value than the average revenue to value multiples typically used in this industry.

Dr Feldman’s new book, Principles of Private Firm Valuation (Wiley, 2005) will be available in March, 2005. One of the reviewers, Mark Beucler, CFO of Lifeline Systems, wrote:

“CFOs of public firms are intimately involved in valuation issues related to acquisitions and divestitures. As private firms are targeted for acquisitions, CFOs of private firms will be increasingly relied upon to offer advice and guidance to owners.  For finance professionals that desire to raise their level of preparedness for the valuation questions that will certainly come, this book offers an excellent start. Principles clearly addresses a number of complex private firm valuation issues including determining the cost of capital, and the importance of transparency and liquidity to establishing the value of a private firm.  For those interested in private firm valuation, I highly recommend Principles.”