Question

Why is it difficult to value the stock of a closely held family business? What factors should be considered when valuing the stock of a closely held family business?

Answer 1

Solution:-

Closely held family business is one of the most significant asset in the business owners estate. It mostly highlights the significant contribution to the nations gross national product and especially for the creation of a job. From the statistics, we can conclude that only 12% can survive from the first to third generation.

Valuation of closely held family business is majorly an estate planning issue but these issues arises in shareholding litigation, divorce, and legal seperation which contributes to qualified retirement plans including estate partition, employees stock options plan, transfers to charitable and non-charitable unitrusts etc.....

It creates a bigger challenge to the estate planner and family advisor. Valuation can be done by applying different methodologies like Earnings approach, Net assets value, Dividend paying capacity, market approach.

The following are the various valuation adjustments they are:-

1. Lack of marketability

2. Built in Capital gain

3. Voting or non-voting

4. Loss of a key managerial person

5. Minority interest

Conclusion -

One of the major issue faced by closely held business owner is the proper valuation of assets family business which us often the dominant assets of the owners estate both financially and emotionally.

The main issue in valuation arrives mostly in transfer tax purposes. A qualified business appraiser always should be utilised as an integral part of the process.