Masonry Magazine March 2001 Page. 38
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masonry business. Surprisingly, it is generally to the advantage of the surviving spouse to obtain a high estate valuation for any and all inherited assets since there is no Federal estate tax. After all, the higher the valuation the less the taxable gain if the masonry business is later sold.
For anyone other than the surviving spouse, it is usually in their best interests to achieve a low valuation. Since every asset in an estate is valued at market value at the date of death, proper valuation is vital regardless of who inherits the masonry business.
How can anyone hope to determine the value of any masonry business or operation regardless of whether it is for the purpose of buying or selling, estate of gift taxes, divorce settlements or merely to determine how much the business is worth for insurance purposes?
According to The Handbook of Small Business Valuation (Glen Desmond and John Marcella), the value of any business may be determined by use of a simple formula:
Net Assets + Property + 1 to 2 times Owners Salary & perks = VALUE
In other words, the value of the business is inventory at cost plus the fixtures and equipment at their depreciated value. Factor in the real estate and non-depreciable property and the owner's salary plus perks and profits retained in the business and the result is a realistic value of any masonry operation.
Although debt and accounts payable are subtracted from this value figure, the end result is usually a cut-and-dried figure that ignores many, extremely important, factors. A good example of those factors which can have a significant impact on the value of any masonry business is provided by the Internal Revenue Service.
The factors relied on by the IRS when they find it necessary to place a value on a business include:
1) The nature and history of the business.
2) The economic outlook in general and the outlook for the industry in particular.
3) Book value (ie., the "net assets" which is the total of all assets minus total liabilities) and financial condition.
4) Earning capacity.
5) Dividend paying capacity.
6) Goodwill or other intangible value.
7) Prior sales of stock of the incorporated masonry contractor or business.
8) Comparison to similar, publicly-traded companies.
When a masonry business is sold, the IRS demands an accounting that requires a breakdown of the assets of the masonry operation. If a trade or business is sold, generally, each asset of the business is treated as being sold separately when it comes to determining the seller's income, gain or loss and the buyer's basis or book value of each of the assets acquired.
The purchase price of a masonry business is allocated among the assets using a so-called "residual method" under which any amount that cannot be connected with an asset is labeled "goodwill".
The buyer and the seller of a business may agree in writing to allocation of part or all of the consideration involved in the transaction and also agree about the fair market value of all assets that are transferred. This allocation will be accepted by the IRS if both parties are bound by the agreement-unless the IRS determines that the allocation is inappropriate.
The purchaser and the seller must both file Form 8594 (Asset Acquisition Statement) upon transfer of the assets used in any trade or business to which goodwill or going concern value could attach.
In the ongoing battle to develop a value for the masonry operation which will benefit both the estate and the survivors, the taxpayer and the IRS and the buyer and the seller, valuation can mean many different things. Into the fray come the "experts" with even more ideas about determining the value of a masonry business.
Some accountants and other business "valuation" experts cannot cope with the idea of valuing any business in a simplistic manner. That is, instead of the basic valuation method mentioned earlier or a similarly simple formula such as several times gross earnings, they keep worrying about the "bottom line" or "net profits" of the masonry business.
What these accountants and "experts" don't seem to realize is that in a masonry business, the bottom line" can be varied by the owner-virtually at will. How much salary does the owner draw? What kind (and nature) are the retirement plans? What kind and the cost of the business automo-
38 MASONRY-MARCH, 2001