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Successful Business Valuations

Updated: Oct 4, 2021

It is more important than ever to get the strongest appraisal possible and stand ready to defend it.


Business valuations are necessary for a wide variety of transactions, agreements, and processes. Family offices will continue to seek out appraisers to help with estate and gift transactions, buy-sell agreements, divorce, and other transfers. For taxable transactions, the IRS has increased enforcement efforts and case law continually changes.

Based on these considerations, it remains more important than ever to get the strongest appraisal possible and stand ready to defend it. This post will help you understand how to work with your appraiser and how to proactively prepare your appraisal to withstand IRS scrutiny.

Why Independent Business Valuations Are Important

Many owners and other professionals believe that they can perform business valuations on their own. Search data from Google indicates there are thousands of searches every month for “business valuation calculators.” It’s easy to understand why owners might believe this. Owners know their businesses better than anyone else. In many cases, they built it from the ground up. They have detailed and wide-ranging knowledge of their products or services, the marketplace, their customers, and their business practices. They know what their business is worth, so they believe they should be able to put that number on a form and be finished.

While we sympathize with this view and recognize the importance of the knowledge that owners bring during the valuation process, the reality is that IRS positions require businesses to comply with very specific rules. If an owner doesn’t comply with these IRS positions and provide robust documentation illustrating compliance, the IRS will likely audit. This is true even if the conclusion is correct.

There are actual rules like the annual exclusion and lifetime exemption amounts, but in regards to valuation, the only real concrete rule is to conform with fair market value. The IRS defines fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” (Regulation §20.2031-1).

Hiring an appraiser is the best way to conform with the fair market value standard. Appraisers have standards like USPAP and professional memberships, like the American Society of Appraisers (“ASA”). The ASA has more specific standards for what qualifies as an appraisal. Even these standards are relatively vague and open-ended. The standards cover defining who the client is and the purpose of the valuation, but have little to do with actual valuation techniques.

How to Work With Your Appraiser

The process used by third-party valuation firms ensures that business owners and other stakeholders have the necessary documentation and data to support a valuation in the face of scrutiny from auditors, the IRS, the courts, and others. While every valuation firm is different, the process will generally begin with a proposal phase, followed by an analysis phase, a thorough client review, and then ending with a full written appraisal report.

During the proposal phase, a business appraisal firm will determine the expected use of the valuation and the extent of the valuation processes needed to satisfy client requirements. This is typically done by discussing the engagement with the client and/or their advisors and reviewing existing documents such as prior financial statements, tax returns, and operating/shareholder agreements. This phase lays the groundwork for the more detailed analysis that begins in the second phase. Interviews with members of the management team are conducted. Finally, a good valuation firm will review their findings with the client in as much detail as the client would like. Many business owners like a highly detailed explanation, which helps identify improvements and increases value.

An experienced appraiser will manage the business valuation with careful understanding that an owner’s time is valuable. Taking the necessary time at the beginning of the process to find the correct documents and provide accurate answers to questions will allow your business valuation firm to prepare a valuation that can be defended, which can save many hours down the road in audits, litigation, and revisions.

The Aspects of a Strong Appraisal

A strong appraisal is one that can stand up to scrutiny. The aspects that support a business valuation include appraiser credentials, appraiser experience, compliance with appraisal standards, sound valuation analysis, well-written reports, and supporting documentation.

Appraiser Credentials

The IRS, the courts, and others who review a business valuation expect the appraiser to have the correct credentials. For example, ASA, CPA/ABV are directly focused on business valuation. Other professional designations including CPA and CFA provide excellent background for accounting, tax, and portfolio selection but require substantial additional education and experience to provide reliable business valuation opinions. Without appropriate credentials, the report is immediately subjected to more intense scrutiny. More intense scrutiny likely leads to an IRS audit. If your original appraiser does not have the required credentials, then your first step in an audit will be to hire another appraiser.

Appraiser Experience

In addition to credentials, the IRS and other groups will evaluate the appraiser’s experience. The appraiser you choose should have experience in the specific type of valuation you need. Each type of valuation has different methods, requirements, and considerations. For example, many appraisers do not like any challenge to their conclusions. Challenges from the IRS are particularly feared. We see many cases where the appraiser puts the IRS’s interest first and the taxpayer’s interest second. Some appraisers accept and apply IRS perspectives which are fundamentally wrong and increase taxes owed by the taxpayer just to avoid being challenged. This type of appraiser may cost you many times the appraisal fee in additional taxes, and you may never know. Pick an appraiser that works with the IRS on a routine basis. Pick an appraiser that is willing to stand up for a correct market position in spite of IRS guidance. Standing up for the market reality can save you many times the appraisal fee in additional taxes.

Experience is especially important when dealing with the IRS. Appraisers rely on attorneys and accountants to stay up-to-date with the frequently changing tax code. However, the tax rules that apply to valuations are different from the rules for many other situations, and the costs of ignoring these rules can be extremely consequential. Substantial IRS experience is a significant appraiser benefit.

Partnering with CPAs and attorneys that specialize in tax is necessary to ensure tax compliance. We follow the marketplace. IRS court cases, revenue rulings, or other IRS guidelines do not make the market because they are specific to certain circumstances (often bad players on one side) and are not written by valuation specialists. These precedents must be carefully considered and artfully managed to reach an accurate result that will withstand IRS scrutiny.

Compliance with Appraisal Standards

The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States. USPAP was adopted by Congress in 1989, and it contains standards for all types of appraisal services, including business appraisal. Compliance is highly recommended for any appraisal shared with the IRS. The Appraisal Standards Board (ASB) writes, amends, and interprets USPAP; the Board does not enforce USPAP. There are no enforcement or licensing standards for business appraisers. Professional appraisal associations have the legal authority to enforce USPAP compliance by their members, however, there is no enforcement in the business valuation community, so buyer beware!

Sound Valuation Analysis

If the numbers in a list don’t add up to the correct sum, you’re going to have problems in an IRS review or audit. Even small, immaterial errors can cause a reviewer or auditor to question what other items are incorrect and lead to more scrutiny. Having any financial analysis or calculations reviewed in detail before issuing a report is critical to avoid undermining a reader’s confidence in the appraisal.

Well-Written Reports

The business valuation report must be professional, polished, and comprehensive. The goal is to ensure that IRS agents, judges, and accountants who read the report will come to the same business value conclusion. Anticipating objections or questions and answering them throughout the report is necessary for success. One of the most common mistakes is not documenting assumptions or the determination of particular numbers. If a valuation report uses a discount rate of 20%, there should be a detailed explanation for how that number was determined. If not, the door is open for the IRS or the other side in litigation to argue. The most effective business valuation reports will tell a cohesive story bolstered by robust documentation.

Supporting Documentation

A strong valuation must be supported with data. Comprehensive documentation of the source of financial information, industry conditions, current business health, management, competition, future expectations, distributions, key people, limitations, and other assumptions or considerations offers valuation support and allows the IRS an ability to resolve without audit. Without supporting documentation, the IRS is virtually required to audit.

Severe consequences can occur without appropriate documentation and attention to detail. For example, in the case of a charitable donation of a partnership holding a single piece of real estate, a real estate appraisal was provided. But since the taxpayer didn’t have an appraisal of the partnership, they got no tax deduction. The documentation was not aligned with the gift. A frustrating outcome, but there was no documentation for the fair market value of the partnership.

How to Defend an Appraisal

The following strategies can help a business successfully prepare an appraisal that stands up to scrutiny from the IRS, opposing counsel in a divorce case, and other adversaries. An appraisal may be a great way to avoid an adversarial relationship now or in the future.

Document Everything

Comprehensive documentation begins during the valuation process, when it is important to document any areas that might come under particular scrutiny, like undervaluing an asset for a gift or overvaluing an asset for a charitable contribution.

Another successful strategy is to make note of any documents that a business does not have and does not use. For example, if you don’t use projections or budgets, it is important to note that in the valuation so the IRS knows that the absence isn’t a mistake.

When an IRS inquiry begins, it is important to document all IRS communications, including calls and meetings. There are thousands of nuanced data points in any business valuation that require an appraiser in the room to focus and clarify. We find that the IRS routinely changes strategies, backtracks on agreed-on valuation aspects, and rejects good-faith arguments or fair offers. This happens because multiple IRS agents may handle a case over years. When documented by a valuation expert, this poor IRS practice drastically weakens their case. IRS attorneys want to win cases, and if the case is weak they are less likely to file. The IRS attorneys will push back and tell the auditors to settle.

Find Areas of Agreement

As part of an inquiry process, it’s important to find areas of agreement. In a typical inquiry or audit, the vast majority of the valuation is not in question. It’s vital to get these areas of agreement in writing. This allows appraisers to focus exclusively on the one or two areas where there is disagreement. Doing so makes it much easier to provide the IRS with specific documentation that shows them why they should accept the assumptions made in the initial valuation.

It is also important because sometimes when the IRS receives this additional information and realizes the need to change their valuation methods to support the initial IRS position, they try to double back and call into question other areas of the valuation. By getting the areas of agreement in writing up front, the IRS cannot do this as easily. Even if they do, it doesn’t go over well with tax court judges and attorneys, often leading to settlements rather than an arduous court case.

Have a Firm Grasp of IRS Opinions

An experienced valuation firm with a comprehensive understanding of the tax code and internal IRS opinions will have a much higher chance of achieving a positive outcome for their client. If the valuation expert knows upfront that the IRS often takes the position that income tax should not be applied to S-Corporations as pass-through entities, they can proactively document and explain why there is still a tax liability which must ultimately be paid by the business owners.

Most clients find it surprising to learn that just because a position is reasonable doesn’t mean that the IRS will think it is reasonable. In fact, there are some very reasonable market-oriented positions that IRS internal opinions forbid. We have heard of several cases when judges admitted that a specific ruling wasn’t the correct way to decide a case, but that their hands are tied because they have to decide based on the data presented in court. A valuation firm that has worked with the IRS for years will help you navigate these issues and ultimately achieve a much better outcome in an inquiry, audit, or court case.

Unique Facts

This appraisal process is all pretty boring. We want to spice it up with interesting relevant facts about the asset being appraised. Especially good are situations the IRS is unfamiliar with. Of course the IRS knows about discounts and they hate them. But a COVID discount? Now the IRS has to figure out something new and they know we are probably right. What about asset concentration, key person, missed budgets, low executive pay, union activity, high turnover, low margins, lack of distribution, high debt, etc. Most of these situations can be planned. For example, high debt is easy. Borrow money and distribute it out, or loan money for expansion.

With planning, we can make boring exciting or at least a little more interesting.

If we have only one argument in tax court it is win or lose. With ten or twenty points we probably won’t get to tax court. The IRS will most likely settle in advance because the arguments are too complex for a sure win in tax court. The IRS picks 100% of its cases, and the IRS attorneys want to win every single one of those cases. Don’t make it easy.

Finding the Right Appraisal Firm

With the IRS increasing enforcement efforts against the backdrop of constantly changing case law, it is vital to have an experienced, credentialed appraiser for your business valuations. Attempting a DIY approach or using a less experienced firm to save money can cost business owners time and money down the road.

Adams Capital has the experience to get you the best possible outcome. We can take the facts of your case and build a compelling and accurate story that can win the day. We know this because we’ve challenged the IRS and won.

Our office offers an initial no-cost consultation to answer questions and provide more information about the business valuation process. Please email us at or call us directly at 770-432-0308​ to schedule a consultation or to learn more.



David Adams is the President of Adams Capital, LLC. He is an expert in the valuation of businesses, business interests, and tangible and intangible property for mergers and acquisitions, corporate recapitalization, privatization, gift and estate tax planning, bankruptcy proceedings, dissenting shareholders, Employee Stock Ownership Plans, and financial and tax reporting. Frequently counseling business owners and families on methodologies to enhance shareholder value.


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