Client Success Stories
Client Retains Over $200 Million in Gift Tax Savings
The Challenge
Our client was a large electronics manufacturer with over $60 million in pre-tax earnings and a 6-year compound growth rate of 25%. They engaged AVGI for a valuation to calculate their gift tax obligation.
The firm was #1 in its market, and neither the owners nor the advisors could identify any adverse market forces that might threaten the firm’s high growth potential. The owners were hoping for a valuation of $500 million, but they understood that the favorable business prospects would likely support a much higher value over $600 million.
The Solution
Through exhaustive market research, AVGI’s appraisers identified several significant value retarding issues, including unforeseen competition from Fortune 100 companies and well-funded new startups, as well as near-saturation of the client’s core residential market. These factors indicated much lower future growth rates and profit margins, leading to an appraised value of only $190 million.
The Result
As a result, the client saved over $200 million in gift tax. By applying AVGI founder Jay B. Abrams’ complex S Corporation Premium model, AVGI was able to save an additional $50 million in gift taxes compared to using the IRS method that prevailed in the US Tax Court case Gross v. Commissioner.
The IRS never challenged this extremely low valuation, even though its audit division regularly contacts this client.
Additionally, AVGI’s market predictions proved correct. In under 3 years, the key startup firm AVGI had identified as a significant threat became the #2 player in the industry, while the residential market declined considerably.
How can our expert valuation
insight help your gift tax case?
We’ve compiled a list of the most common questions our customers ask. If you can’t find the answer you’re looking for here, please don’t hesitate to contact our customer support team, and we’ll be happy to assist you.
A business evaluation is not necessarily the same as a business valuation. Business evaluation is a much broader term that can refer to auditing any aspect of a business, such as business processes, phone systems, or overall efficiency, but does not explicitly refer to evaluating the monetary value of the business.
In contrast, business valuation refers exclusively to establishing the firm’s monetary value. Colloquially, people often use the two terms interchangeably, so someone looking for a business valuation may search online for business evaluation services.
When your business is already in transition – either through a planned sale, takeover, merger, transfer, or bequest of a business entity – it is often too late to make strategic changes to influence the business or increase its value. Value enhancement, therefore, must begin some time before so the business growth consultant can value your business and suggest value enhancement opportunities. AVGI suggests connecting with a business growth consultant at least 2 years before selling a business.
Key value drivers are the aspects of a business that drive its success and profitability. Some value driver examples include the customer base, the skilled staff, or the business’s technology. A business consultant identifies drivers by looking at financial statements and asking, “What drives productivity here?” and what factors drive those drivers. The base drivers of a business are the capital and operational factors. The business consultant examines the effect of changes in each driver on the overall value of the business. This important step enables the consultant to determine and reexamine management priorities. A business growth consultation with a valuation expert enables the business owner to understand what the future business landscape may look like through various calculations, which helps make a decision about managerial priorities to chart a path to increase business value.
To increase the value of your business until you sell it, you must formulate a plan of action that will maximize its sales price. Part of this plan will be identifying factors that might be pulling down the value of your business, and reducing their effect as far as possible. Another part of the strategy will be identifying opportunities to increase its value and pursue them energetically. Examples of draining factors might be concentrating sales to a limited number of customers, debt, and relying heavily on key individuals to keep the business running. Factors that could increase the value of a business often include goodwill, intellectual property, and having excellent customer relationships.
Obviously, it is important to track how effective each strategy is in increasing the value of your business, especially since you will need this information when demonstrating the marketability of your business to prospective buyers.
When the owner of a business prioritizes activities that will increase profitability, security, and business growth, and so on, the business becomes appealing to an investor (or, potentially, a buyer). It is easier for a business to grow, such as by increasing the number of stores, healthcare facilities, restaurants, or some other assets, when the business demonstrates active value driving. It will be easier to get a loan, and people will be more willing to listen to your ideas. The value of a business is determined by business valuation, which considers key value drivers and business growth plans. If you want your business to grow, you must focus on value driving.
Different types of businesses can expect results from a business growth strategy after different amounts of time. Some businesses need a 5-year business growth plan; however, other businesses expect to see some return on investment after as little as 6 months. True value enhancement in a business often requires long-term campaigns that must run for some time to demonstrate results that can withstand buyer or investor scrutiny. An effective business growth strategy will consider typical sales cycles for that product type and whether the business markets a high-end product, as these take longer to show accurate results.
Some businesses hire a business growth coach who will help put a business growth plan in place and remain connected, to support business growth until there are reliable, powerful results.