Put a Valuation Expert on Your Tax Planning Team

In this rapidly changing economic climate, business owners, family offices, and high net worth individuals are bracing for seismic reforms in the US tax code and a stricter regulatory environment. Concerns over President Biden’s tax policies and continued economic stimulus has caused investors to put their trusted financial advisors (e.g., CPAs, lawyers, and investment advisors) on speed dial. 

In addition to the Biden Administration’s sweeping proposals to bolster social safety net programs by raising taxes on wealthy Americans, new rules governing the tax treatment of long-established financial instruments have stressed financial markets and worried investors.

On April 21, 2021, the Securities and Exchange Commission (SEC) issued accounting guidance that effectively stymied special purpose acquisition companies’ (SPACs) transactions. SPACs, also referred to as “Blank Check Companies,” have recently gained notoriety as a relatively simple, quick, and efficient means for taking private companies public. 

SPACs are short-term investment vehicles formed to raise capital, pursue private company targets, and access public markets.  Their recent rise in popularity was dealt a severe blow with the SEC’s sudden policy change.  CNBC reported SPAC deals fell 90% from over one hundred in March 2021 to just ten the following month.

Under the new rules, SPAC warrants will now be considered liabilities instead of equity instruments. Classifying warrants as liabilities impacts financial statements and investment strategies beyond the balance sheet. The change will cost companies a lot of money to reevaluate their position and cause others to question SPACs viability as an investment vehicle going forward.

Valuation Experts Add Value

Savvy investors, rocked by recent news, are making sure to include business valuation experts on their advisory team of tax professionals and estate planning attorneys. The primary uses of valuations include estate taxes, gifting of ownership interests, personal divorce, business divorce, business succession planning, analysis of buy-sell needs, and business sale or acquisition.

Early evaluation and strategic structuring of governing documents, amendments, and operating agreements will protect assets and minimize tax liabilities. Taking advantage of business valuation discounts such as those demonstrating lack of control or marketability can have a meaningful impact on a single transaction or an entire portfolio. 

For example, when creating a management structure, it is important to delegate authority carefully. Assigning primary operational responsibility to principals creates fewer opportunities to utilize the lack of control discount. Conversely, a business owner would be wise to maximize discounts by annually shifting small portions of the company’s equity to an heir without control. Other valuation discounts, such as a lack of marketability, are typically associated with investments in private companies. The value is limited as it is more challenging to sell private company shares than shares of a public company. Investors with large share blocks can also receive discounts since their shares cannot be readily liquidated.

Getting it Done

Business valuation experts perform a straightforward and streamlined review of governing documents, financial statements, distribution agreements, and debt arrangements to develop their quantitative analysis. A qualitative assessment of assets and liabilities follows in consultation with management. After approximately two weeks, the goal is to provide an independent and objective opinion that answers the client’s questions and assurances the asset value to those in need-to-know positions.

Annual valuations offer a financial insurance policy for business owners, investors, and their professional teams. Proper planning with a business valuation expert saves you money by minimizing the risk of higher taxes and potential IRS penalties and limiting unexpected professional fees that could destroy hard-earned wealth if an unanticipated business sale or premature death occurs. 

Stuart Neiberg is the Director of Daszkal Bolton’s Business Valuation practice. He is a CPA accredited in Business Valuation. His experience includes transaction analysis, corporate planning, and M&A. He holds a Chartered Financial Analyst Designation and active securities licenses.


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