The financial press is reporting billions of dollars to be inherited by baby boomers and/or their heirs over the next two decades. Much of that estimated figure is attributed to privately-held businesses and real estate. To take advantage of living trusts, gifting, and other tax vehicles, appraisals are needed to determine the Fair Market Value required with the final Estate Tax filing and to avoid burdening your heirs with a tax nightmare.

The settlement of an estate can be a complex undertaking. For those estates that own businesses, the settlement of an estate can become even more complicated without proper planning. Federal laws regarding estate tax, inheritance tax, and gift tax change like the wind – it is important to the future of your business and your heirs after you’re gone that you put a plan in place now.

One essential part of your estate planning is knowing the value of your business, both for succession and tax planning purposes prior to death and for settling the estate after death. A business valuation will provide the information you need to make informed decisions regarding your estate.

In many cases, the value of a business is intertwined with its machinery and equipment and/or the underlying real estate. This is especially true with specialty businesses in which the equipment used to produce is a major asset of the business, such as a machine shop or chemical plant.  This is true as well with special purpose properties in which the real estate is a major asset of the business, such as car dealerships, mobile home parks, golf courses, or hotels.

In these cases, it is beneficial to the business owner to complete a business valuation and separate machinery and equipment (M&E) and real estate appraisals to provide a more accurate assessment of the total value of the business. By properly separating each component from the other, it is easier to estimate an entity value conclusion that is specific and takes full consideration of all sources of value to the business.

This is especially helpful when a business owner holds partial interest in many entities. Having independent valuations of the business and attached M&E and real estate can assist you and your financial advisor when making succession and estate decisions and will aid your executor, attorney, financial advisors, and business partners in determining the value of the of the partial interest in each entity.

The key to effectively apportioning real estate value and business value is an attribution of a fair market rent associated with the business’s real property. This rent serves as a reduction of cash flows for purposes of generating a business value and is also the basis for determining the value of the real estate. On the other hand, valuing M&E assets differs from other appraisal disciplines because an item’s value can differ depending on the specific premise of value, such as liquidation or going concern value.

Determining separate stand-alone real estate, M&E, and business entity values will result in a more meaningful, defensible value conclusion.

Sobel EAC Valuations, LLC, a full-service valuation firm, has the valuation professional on staff that you need to assist you with your succession and estate planning. We will work with you, your attorney, and your financial advisor to ensure you have the information you need to properly prepare yourself and your heirs for the future.