Case Study – Estate Planning – Two Phases

Case Study #5 – Estate Planning – Two Phases

Company X (company details removed for privacy purposes)

  • Part 1:
  • InteleK and a tax & financial advisory partner firm of InteleK collectively built a two-phase product for their clients, taking advantage of proper valuation, executed proactively at the opportune time for advantageous results for the client.
  • Company X, one of many firms to go through this special two-phase product, is a building construction firm, where the owner(s) were wanting to improve their corporate, tax and legal structures and overall exit and estate planning, of which their business value was a material value of their overall estate.
  • InteleK undertook an Indicative Valuation for the client, providing an ‘indicative value’, under the Fair Market Value standard (the standard appropriate for exit and estate planning) built on state-of-the-art processes, from both a legal and financial perspective, being the same process as used within a detailed appraisal report.
  • This preliminary valuation informed the owner and their advisors of the business’ current market value, associated business risks and the key value drivers. This indicative value was presented as a range, where the certified appraiser sat with the business owner and their advisors, identifying the factors that can place the business at the top, middle or bottom of the reasonable valuation range.
  • Specifically, we estimated the impact on valuation multiples from changes in the operating margin, revenue growth rates, the impact on key person discounts given the development of a robust succession plan and a rigorous multi-year growth rate.
  • We also provided education and guidance on the improvement of the quality of financial statements, including getting an eventual audit - the foundation of any reliable valuation and the source of potentially significant value improvement.  For example, we demonstrated the impact of establishing economically meaningful depreciation estimates on and removing personal transactions, both of which can materially impact valuation.
  • Finally, we provided guidance on various exit planning options and their advantages and weaknesses such as private equity sale or employee stock ownership plan (ESOP) sale, which few understand and can educate on.
  • The result was that this client worked with their advisors, factoring in everything from potential legal/corporate structures, estate tax exemptions, to who and when the passing of wealth could be conducted, life and key man insurance and strategic / growth plans. All of which had the starting point of the indicative valuation, providing the necessary information to make subsequent decisions more informed, easier and more advantageous based on the input of the advisors.
  • Part 2:
  • Several months later once the owner had worked with their advisors to set the appropriate structure, which involved a new corporate structure, and initial gifting of equity interests in the subject business, triggered the need for a formal appraisal report. The Detailed Appraisal Report that would be submitted to the IRS to establish the fair market value of the business and specific gifting interests was compiled.
  • The formal Detailed Appraisal was conducted with no surprises, as the preparation had been done via the Indicative Valuation and work with their advisors. The report was customized for the unique situation of the client, complete with appropriate support, justification and citations, producing highly defensible conclusions of value. The value of the highly defensible report is that it minimized the risk of audits, investigations, penalties, or worse, litigation and inaccurate taxation; while taking advantage of improved valuation and tax planning benefits identified in phase 1.

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