CPA Practice Advisor - 43

Those valuation changes can
have major financial implications
for divorcing couples, estate planning, those looking to buy or sell
a business, or becoming an equity
partner in an enterprise.
"Depending on your position,
there are potential windfalls in
these valuation changes or huge
losses," said Paul Wapner, CPA,
ABV, CGMA, senior manager
of valuation services for the
Association of Inter national
Certified Professional Accountants.
"It's important that people consider
how valuation changes will affect
them financially both now and in
the long term."
Business
valuat ions
are
forward-looking and there are
multiple approaches to them. An
income approach to valuation
applies an opportunity cost of
capital to an expected future
benefit stream, such as cash flows
or net income, while a market
approach applies multiples, such
as price-to-earnings, derived from
reasonably comparable companies.
The pandemic forced the
closure of many businesses, such as
bars, restaurants, and gyms, while
others were able to remain open
but at different operating levels.
This will have a major impact on
cash flow and net income, driving
down valuations.
The CARES Act added other
considerations into the mix.
Changes to tax laws can create
one-time surges in cash flow, while
the Paycheck Protection Program is
providing additional funding, much
of which will not have to be repaid
if conditions are met. These efforts
have helped many businesses stay
afloat but may not be enough to
maintain or enhance their value.
Those who may be affected
should consult with a CPA or
valuation expert before making
major financial decisions.

THE BUSINESS OF
BREAKING UP
For the approximately 800,000
couples who get divorced each year,
they are looking at major potential
changes in the value of their real
estate, investment portfolios or
jointly owned business interest,
and this could alter how much one
must pay the other in the divorce
settlement.
"If you star ted divorce
proceedings at the end of 2019
and determined your asset and
business values before February
2020, you should consider updating
those figures for the economic
effects of COVID-19," said Nathan
DiNatale, CPA, ABV and member
of the American Institute of CPA's
(AICPA) CARES Act Valuation
Impact Task Force and immediate
past Chair of the AICPA Valuation
Committee.
Recent economic changes may
have reduced the values of their
home, shared investments or
businesses, and it may be many
years before the values of those
assets return. Depending on how
those assets are divided, one
spouse may be set up for a bigger
rebound in the future or paying
more than they should.
"What is good for one spouse,
many not be good for the other,"
said DiNatale.
Divorcing couples should look at
their settlement plans to determine
whether they need to consider
re-valuing their jointly held assets
before concluding the dissolution
of their marriage.

ESTATE CONSIDERATIONS
For those managing large estates,
now may be an opportune time
to transfer ownership stakes of a
business, real estate or investment
holding company to family
members or a trust. The IRS limits
your lifetime giving exemption to
$11.4 million.

The COVID-19 pandemic has
pushed some stock prices down,
forced many businesses to close or
cut back operations, and may have
reduced real estate values. But like
many investments, these drops are
likely temporary.
Investment holders who have
been considering passing their
holdings on to family members or
a trust can take advantage of the
current lower valuations to transfer
more shares or a greater percentage
of their ownership stake and stay
under IRS limitations.
There are other valuation
considerations as well, such as
discounts for lack of marketability
or lack of control, that can be
applied in some situations to
increase estate tax savings.
Marketability discounts reduce
the market value of closely held
or restricted shares of enterprises
that do not have an active market,
while lack of control discounts
reduce the market values when the
ownership interest lacks control
over the entity.
CPA estate planners can work
with valuation professionals to help
those looking to distribute their
wealth to optimize their giving and
minimize their tax liability as part
of a holistic tax planning strategy.

BUYING OR SELLING A
BUSINESS
It's more of a mixed bag for
people looking to buy into or sell
a business.
For those looking to buy into a
business, now may seem like an
ideal opportunity, as one can get in
at a lower cost. But it can be more
complicated than that, depending
on the type of business and other
equity partners.
If existing owners or partners
do not need immediate additional
capital, they can opt to hold off on
taking in new partners until the
value returns or maintain their

AUGUST 2020 ■

Those who
may be
affected
should consult
with a CPA or
valuation
expert before
making major
financial
decisions.
initial price with expectations that
the business will recover quickly.
For those looking to sell a
business, they have to weigh several
factors, including a potentially
reduced sales price resulting in a
lower tax bill on the sale and how
fast they need to get out.
"If owners can wait to sell,
valuation specialists can help
them model forecast scenarios and
determine what may need to be
done to help recover lost business
value and how long that might
take," said Bethany Hearn, CPA,
ABV, CFF and chair of the AICPA's
ABV Credential Committee.
The AICPA also recently
released a set of FAQs discussing
ways the CARES Act can impact
valuations and how valuation
professionals can address them. ■
James Gallagher is the public relations
manager for the AICPA.

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