When you are dealing with the IRS Revenue Ruling 59-60, it can seem a bit daunting to understand the rules of business valuation for a closely-held corporation. Essentially, the ruling outlines the general approach and methods, as well as the outlines for them, to be considered in valuing shares of a capital stock for estate tax and gift tax purposes of closely-held corporations. All clear? No? That’s okay, we will go into more detail about this.
The ruling came into effect over 50 years ago, but it is still important today for how shares of closely-held corporations are valued.
Interestingly enough, this ruling should actually be used for family law and it is very common for it to be used. When someone owns a business, and they started that business when they were married, and then they go through a divorce, there needs to be an equitable distribution of the shares of the company. A property settlement must take place. This ruling serves as the basis for understanding the framework of the business value, and therefore is very important whenever business owners are divorcing from each other.
One of the most important things to understand is fair market value because the appraiser is going to be calculating this value when determining the value of the business. This is an estimate of the value on any property. It is calculated as the price that a buyer would be willing to pay, and a price that the seller would be willing to accept. Finding the fair market value is not too difficult and can be done with an online value book.
There are also eight factors to consider when determining fair market value:
- The nature of the business and its history since it was created.
- The economic outlook in general and the condition and outlook of the industry the business is in.
- The stock book value and the condition of the business in financial terms.
- How much the company can potentially earn.
- The dividend-paying capacity of the company.
- If the company has intangible value or goodwill. The goodwill is the earnings in excess of a normal rate of return based on certain factors.
- The sales of the stock and the block of stock value.
- The market price of the stocks of the company.
It is important that, to have these eight factors assessed properly, you have someone who has been trained in this area. These are people who are a Certified Public Accountant, a Certified Business Appraiser, or an Accredited Senior Appraiser.
Having an expert come in and assess the business value will not only make things easier on you, but it will ensure that the proper value of the business is determined. This will keep you from undervaluing your business, or even overvaluing it. Understanding the factors of how this is all determined will ensure you understand why the expert has to take so long to determine the value of everything.