The National Trust Closely-Held Business Association held its annual conference last week in Cleveland, Ohio. Nick Sypniewski, Managing Director of ComStock Advisor’s Cincinnati office, along with other industry experts, participated in an informative valuation roundtable discussion.
Valuation topics relevant to the attending fiduciaries of closely-held businesses included tax law changes, discount methodology, and IRS activity.
The experts noted the effects of the Tax Cuts and Jobs Act on their valuation of closely-held businesses goes beyond just the overall increase in value due to the decrease in the federal tax rate on corporate income. Other issues to consider are the law’s changes to accelerated depreciation and limitations on interest expense deductions, which was noted to have particularly influenced valuations involving private equity which are typically highly-leveraged. The changes in the tax law also need to be considered in the market approach regarding merger and acquisition transactions and the comparability to pricing multiples under the previous law.
Discounts for lack of control and lack of marketability were also discussed. In closely-held business valuations, the dynamics presented in the entity’s operating agreement largely influence the appropriate discounts. Other factors taken into consideration are customer concentration, volatility and industry dynamics. Methods noted by the experts used to quantify discounts were the Stout Restricted Stock Study, closed-end fund data and Partnership Profiles.
Attendees inquired about IRS activity as well. The panelists noted the IRS commonly challenges discounts especially those taken by holding companies.