A CEO and a financial consultant offer tips and advice about third-party valuation and avoiding IRS trouble.
Last year Peter Balner, the 47-year-old chief executive of Palmer Video, a video retail chain based in Union, N.J., decided it was time to start giving small stakes of stock to his two teenage children. "It was part of what I consider an ongoing process of estate planning," he explains. The first step involved getting an independent valuation of his 13-year-old company, which currently has sales of about $22 million annually.
It makes sense for private companies to get valuations when owners anticipate some type of stock transfer, says Ron Torretti, the president of Mid-Atlantic Cos., a Mount Laurel, N.J., financial consultancy for growing businesses. Appropriate circumstances might include the planning or implementation of a buy-sell agreement; the transfer of stock to an owner's children or a management team; or the establishment of an employee stock ownership plan.
So what's the big deal about a third-party valuation? "If you put too low a value on your company's stock in an effort to avoid income or estate taxes, and the IRS overturns that valuation, you're open to assessments of penalties and back-interest charges as well as overdue taxes," warns Torretti.
Fortunately, valuations are fairly easy to come by. "The whole process took us about six weeks and cost around $10,000," says Balner. "We hired an independent consulting firm that specializes in valuations and provided them with three years' worth of financial results, our projections for the next couple of years, and some insights into our industry."
Two tips from Torretti: Don't rely on an internal staffer or your regular certified public accountant or lawyer to perform the valuation, because the IRS may discount his or her independence and credibility. And in case of an IRS audit, make certain to retain all the records that document your consultant's valuation.