Valuing a Business for Tax or Estate Planning Purposes

Robert Hulet, CBA, CVA
Oct 18
5 min read

Valuing Business for Tax or Estate Planning

[Note: This is not legal advice. If you require legal advice, seek legal counsel.]

When it comes to transferring business ownership—whether as part of a succession plan, a gift, or an estate settlement—the question isn’t just “What is the business worth?” but “What is the business worth for tax or estate planning purposes?” In this article I will explore why “valuing a business for tax or estate planning purposes” is so critical, how valuations differ in this context, the common methods and discounts used, and practical steps business owners can take to prepare.

Why Valuation Matters in Tax & Estate Planning

For many business owners, their company is their most valuable asset. If the business is transferred due to death, gift, or other estate‑planning event, the valuation can drive significant tax consequences. Here is an overview:

Business valuation is indispensable in estate planning because it allows you to know how much wealth you are transferring and to whom.
For estate and gift tax purposes, the IRS expects business interest valuations to reflect fair market value under appropriate assumptions.
Transfers of a closely held business interest to heirs may trigger large tax bills if the valuation is high or discounts are not applied.

In short: an accurate, well‑documented business valuation is both a compliance necessity and a strategic planning tool.

The Unique Challenges of Valuing a Business for Estate or Gift Tax Purposes

Valuing a business for a sale, merger or financing often focuses on what a buyer might pay under open market conditions. By contrast, when valuing for estate or gift tax purposes, additional considerations apply:

The transfer may be a “non‑market” event (e.g., a gift to family, not a full sale) so factors like lack of marketability or lack of control are very relevant.
Timing matters: The valuation date may be the date of death or date of gift, with all facts known as of that date.
The IRS and courts look for appraisals that reflect appropriate assumptions: willing buyer/willing seller, knowledge of relevant facts, no undue compulsion. (see Rev. Ruling 59-60)
Discounts may apply for minority interest, lack of marketability, and other factors that reduce the practical value of the business interest being transferred.

These distinctions mean that you cannot simply use a “business sale value” and assume it works for estate or gift tax purposes. Planning and documentation matter.

Valuation Methods: How Appraisers Approach This

Here are the three primary valuation approaches used in estate/gift tax business valuations:

1. Asset Approach

This method values the business based on the fair market value of its assets minus liabilities. It is most applicable in situations where the business is asset‑intensive or not a going concern.
In estate planning, the asset approach may serve as a floor value; going‑concern value often exceeds it.

2. Market Approach

Uses comparable company or transaction data to estimate what similar businesses sold for. For privately held businesses it may be harder to find reliable comparables.
When valuing a business undergoing a transaction (e.g., sale or merger) at the same time of estate planning, careful judgment is needed on whether to incorporate the transaction value.

3. Income (or Earnings) Approach

Estimates the business’s value based on its ability to generate future economic benefits (cash flows, profits). Methods include discounted cash flow (DCF) or capitalization of earnings.
Particularly relevant for going‑concern businesses that have future growth prospects.

Most credible valuations for estate or gift tax purposes will use more than one approach, reconcile results, and explain assumptions clearly.

Discounts and Other Adjustments That Matter

Because transfers often are to family members and are not open‑market sales, adjustments are frequently applied:

Minority interest discount: A non‑controlling interest is typically worth less than a pro‑rata share of the entire business.
Lack of marketability discount: Private business interests are harder to sell, so their value is often lower than marketable shares.
Other adjustments may consider the specific ownership block, any restrictions on transfer, and the business’s specific facts and circumstances.
Proper documentation of the discount rationale is critical for the IRS and courts.

Strategic Steps for Your Business to Prepare

Here are actionable steps business owners should take when you’re thinking about “valuing a business for tax or estate planning purposes”:

Engage a qualified business appraiser early. Don’t wait until death or a crisis. Early valuations give you strategic options.
Document your assumptions and methodologies. Ensure the report addresses the specific tax/estate‑planning purpose, the valuation date, relevant facts, and links assumptions to your business’s characteristics.
Review your financials and business structure. Clean, accurate financial statements and clarity about ownership interests make the valuation smoother and more defensible.
Assess whether you have minority interests or special terms. If you own less than 100% or have stock restrictions, consider how these factors will influence value.
Consider implementing planning techniques now. For example:
- Gifting minority interests while discounts apply
- Using trusts (e.g., family LLCs) to transfer interests efficiently
- Reviewing buy‑sell or shareholder agreements to make sure valuation mechanics are set in advance
Re‑value periodically or when business changes significantly. Business value can shift with industry, economy, or internal changes. Keeping valuations current helps.
Communicate plans with heirs and advisors. A clear plan reduces conflicts, ensures transitions run smoothly, and helps heirs understand the tax ramifications and business implications.

Common Pitfalls to Avoid

Using a “sale value” from a recent transaction without validating it for estate or gift tax context. If the transaction wasn’t arms‑length or subject to special terms, the value may not hold up.
Failing to apply or document discounts when appropriate. If you ignore minority or marketability issues, you risk higher tax bills or IRS challenges.
Waiting too late. If you wait until death or a crisis, you might lose key planning opportunities and flexibility.
Using outdated financials or unclear ownership information. That undermines credibility and increases risk of challenge.

Why This Matters for Your Legacy

For business owners wanting to preserve wealth and control, transferring the business without proper valuation and planning can have unintended consequences:

Heirs may face large tax bills and need to liquidate parts of the business to pay them.
The business may lose competitiveness or control if ownership transitions poorly.
A well‑executed valuation and plan strengthens your position: you retain control, minimize taxes, and maximize what your heirs receive.

Final Thoughts

“Valuing a business for tax or estate planning purposes” is not a one‑size‑fits‑all exercise. It requires understanding your business, the transfer context, applicable methods, potential discounts, and the timing of transfer. The more prepared you are today, the more control you’ll have tomorrow when the business passes to the next generation—or to someone else. If the business was your life’s work, don’t leave its transition to chance. Start the valuation and planning process now.