Business valuation for sales, partner exits and IRS cases

A business needs a valuation whenever someone has to agree on what it is worth and the market hasn’t said. A sale is the obvious case. A partner leaving under a buy-sell arrangement is another, and so is an owner’s estate, where the value of a closely held interest is what Rev. Rul. 59-60 was written for.

The fourth occasion is particular to a tax representation practice. In an Offer in Compromise, the IRS adds the equity in your assets, business assets included, to your future income to reach the minimum it will accept. An owner who doesn’t know what the business’s equipment and receivables are worth is negotiating against the IRS’s figure.

The old site lists business valuation among the firm’s services without describing a method or a report. What a valuation engagement produces is agreed with Tyrone J. Taylor at the outset, and this page doesn’t promise a particular product.

The IRS uses fair market value, which Rev. Rul. 59-60 defines as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” The ruling then lists the factors a sound valuation weighs.

• The nature of the business and its history from inception
• The economic outlook in general and for the specific industry
• Book value and the financial condition of the business
• Earning capacity
• Dividend-paying capacity
• Goodwill or other intangible value
• Prior sales of stock and the size of the block being valued
• Market prices of comparable companies whose stock is actively traded

The ruling says no formula can be devised that fits every case. Common sense, informed judgment and reasonableness carry the weight.

Business value enters an offer line by line, through the asset sections of the IRS’s own forms. On Form 433-A (OIC) a self-employed person lists each business asset at current market value, multiplies by 0.8 and subtracts any loan balance. On Form 433-B (OIC) a business does the same, and both forms ask for accounts receivable and notes receivable, with the age and amount of each.

One detail on Form 433-A (OIC) favors working owners. A self-employed person’s asset that is leased, or used in the production of income, is entered at zero, and the form also allows a deduction for professional books and tools of the trade. Getting those entries right moves the minimum offer directly, which is why a valuation and an Offer in Compromise are often prepared side by side.

Tyrone J. Taylor brings the financial training and the IRS’s side of the table. He holds a BA in Economics, an MBA and a Master’s in Accountancy, and through Pro Tax Education he taught tax professionals account and financial analysis, the same work the IRS does when it reads a Collection Information Statement.

That combination fits the valuations that touch a tax matter: an owner settling with the IRS, a partner exit where the buyout has to be funded around an existing balance, or a business sold while an IRS balance is still open. For a valuation needed for a sale or estate with no IRS involvement, the scope and method are agreed with him at the start. Related planning is on the business consulting page.