CLOSELY HELD BUSINESS

(FW) Value of a business must be valued at death. the IRS has determined eight factors to be take into considerations by an appraiser. These are valid for partnerships and sole proprietorships as well.

1. What does the company do? Is it involved in the sale of goods and services. Have sales been increasing or decreasing? Are product lines diversified or offer only one? What kind of inventories, equipment and facilities does it have?

2. What is the economic outlook in general and the outlook of the particular industry of this company? Is the company a leader? Is the industry/company on the cutting edge of new technology or are its products becoming obsolete?

3. What is the financial condition of the company? What is the debt ratio, working capital, long term debt, net worth?

4. What is the earning capacity of the company? This is considered by the IRS as perhaps the most major factor. What are the profit centers within the company, its major operating expenditures? Are earnings increasing or decreasing from year to year?

5. What is the dividend paying capacity? Though closely held companies rarely pay dividends since owners are substituting salaries and bonuses which are tax deductible by the company where dividends are not, if this were a publicly traded company, what dividends might be expected?

6. Does the company have any goodwill through a brand name or a record of successful operations over a long period of time.

7. Have there been any prior sales of stock? Arms length? How large is the block to be valued? Is it a majority or minority interest?

8. What is the market value of similar publicly traded stock?

Additional attention is also paid to physical location and condition of retail stores and the demographics of the local neighborhood and, particularly, the discretionary income of the consumers in the area. Are the goods perishable, what is their markup, how much is inventory turnover, what is the credit worthiness of the company and what is the relationship with suppliers? Manufacturers are analyzed by their ability to develop and produce new products. Are they sold directly to the public or are they part of a larger system? Are the products easy and economical to transport? Are scarce raw materials needed, do there prices fluctuate widely?

Service companies are valued by their ability to generate fees and commissions. Generally the goodwill may outweigh the value of tangible assets. It is the trust and integrity that consumers value- perceived or real- that is their lifeblood. Further questions are whether it adapts well to changing markets and customer requirements, how well it provides support to its professional staff.

Finally the article notes that the death of a major player can have a serious negative effect on earnings and value- but this is not a major factor for the IRS. They are to value the assets at the time of death, not in view of subsequent events.