Situation

When the owners of a New York-based food processing company were ready to transfer the business to the next generation, they needed to determine a value for all company assets for estate tax filing purposes.

Complicating matters were potential disagreements among company shareholders, who were worried about litigation, and among the siblings poised to take over the company, who had questions about how shares were previously transferred. Many were also questioning what asset values would be used to determine the overall company valuation.

Solution

The company was already a long-time client of Springline Advisory and turned to Springline’s Business Valuation team to help.

The team started with a meeting with the company’s attorney and the three executors of the estate to review the complicated process and how the team would engage all appropriate parties, including legal professionals, accountants, tax professionals, executors and others.

With various ownership structures, several holding companies, an operating company and real estate assets, the company required a close examination to determine fair market value, said Maureen Rutecki, a partner at Springline and a qualified appraiser.

“What typically happens with family-owned entities is either compensation is not charged at fair market rates or there’s rent charged from one entity to another — or not charged and should be charged,” she said. “It’s about peeling back some of these layers to truly get the fair market value in each entity. And it can become especially challenging if the ownership is not the same in each.”

The Springline team evaluated the various entities, including the operating companies and the real estate holding companies. They considered the values reflected in the real estate and equipment appraisals, as well as the restrictions on shareholders in the governing documents. Rutecki also looked at the different ownership structures and how they affected shareholders.

“Some businesses have more value than others,” she said. “And if the operating business is not making a ton of money, then the value could be in the real estate. It can make a difference as to where it is.”

Results

At the completion of the valuation process, Rutecki and her team produced a qualified appraisal — saving the company approximately $1.7 million in estate taxes.

One of the executors wrote Rutecki a hand-written thank-you note expressing her gratitude for the family-owned company’s business valuation reports:

“They were top-notch, the best I have read in over 30 years of banking,” the note read. “Due to your well-documented and detailed reports, I’ve been better able to complete my job as executor. Your wonderful summary prompted me to reread the shareholder agreement and review it with the financial summary report. This up-close comparison prompted some good questions and a review of the agreement before ownership shares are distributed. In my personal opinion, it may have averted a difficult time.”

Rutecki said the successful engagement was simply a result of the extensive experience Springline brings to the table.

“We already have a lot of the documents in-house – including tax returns, financial statements, and the knowledge and understanding from our accountants and tax professionals – so it’s a great example of why it’s beneficial to do valuations for our own clients when we can.”