Posts Tagged ‘Jason Thompson’

What Factors Should Valuation Analysts Consider When Valuing A Business?

Jason ThompsonBy Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services

When performing a business valuation, a valuation analyst reviews numerous factors that may impact the resulting value. While the specific factors considered may vary from business valuation to business valuation, Internal Revenue Service (IRS) Revenue Ruling 59-60 identifies certain factors the IRS considers fundamental to analyze when valuing a closely held corporation’s stock.

IRS Revenue Ruling 59-60 was developed to provide guidance for valuing a closely held corporation’s stock, when market quotations are not available, for estate and gift tax purposes. Because this guidance comes from the IRS, it is considered by most valuation analysts as a relevant guidance when performing any valuation engagement.

The following is a discussion of the “Factors to Consider” identified in IRS Revenue Ruling 59-60:

  • The nature of the business and the history of the enterprise from its inception – This factor deals with issues like stability or instability, growth or lack of growth, the diversity or lack of diversity of operations, and other facts needed to form an opinion of the degree of risk involved inside the business.
  • The economic outlook in general and the condition and outlook of the specific industry in particular – This factor considers the current and prospective economic conditions as of the date of the valuation, both in the national economy and in the industry or industries the business operates within. These factors are issues outside the business that impact risk.
  • The book value of the stock and the financial condition of the business – This factor addresses issues like liquidity, reported values of assets, liabilities, working capital and debt, capital structure and net worth. These factors are helpful in identifying financial risk for the business.
  • The earning capacity of the company – This factor deals with financial performance and the use of trends in financial performance as predictors for future financial performance. This is another mechanism for identifying the financial risks of the business.
  • The dividend-paying capacity – This factor, which differs from the previous factor, addresses the amount of funds flowing through the business to owners and the amount of funds that could reasonably flow through to owners without jeopardizing the financial stability of the business.
  • Whether or not the enterprise has goodwill or other intangible value – This factor deals with whether the business has value beyond that of its tangible assets. In many cases, the existence of “excess” net earnings over and above a fair return on the business’ tangible assets is an indication of goodwill or intangible value. In certain situations, the identification of goodwill or intangible value is needed as part of the business valuation.
  • Sales of stock and the size of the block of stock to be valued – This factor and the next both address the consideration of known transaction data. In this case, the transaction data is other sales of the subject closely held corporation’s stock. While this information may exist, careful consideration of the terms and the block/position previously transacted is necessary before applying this data in a current business valuation.
  • The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter – This factor directs a valuation analyst to consider published transaction data for other companies when valuing a closely held corporation. We refer to this as a Market Approach. The market approach is based on the theory of substitution, meaning that the known value of a business’ stock can serve as a benchmark indicator of value for the subject closely held corporation’s stock.

At Sponsel CPA Group, our team of valuation experts is well versed in not only the factors to consider from IRS Revenue Ruling 59-60, but also many of the other factors that influence the value of a business.

If you have questions about the value of a business or the valuation process, please call Jason Thompson at (317) 608-6694 or email

Treasury Pulling Back from Limiting Valuation Discounts

Jason ThompsonBy Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

Earlier this month the U.S. Treasury announced its plans to withdraw its newly proposed regulations under Section 2704 related to limiting valuation discounts. The move came after intense pushback from valuation experts, the estate planning community and family business owners.

The move is good news for owners of closely held businesses who plan to eventually pass the company on to the next generation.

Commenters on the proposed regulation claimed Section 2704 would have hurt family-owned and operated businesses by making it difficult and costly to transfer companies to the next generation. Critics also claimed the valuation requirements of the proposed regulations were unclear and could not be meaningfully applied.

Treasury Secretary Steven T. Mnuchin made the announcement as part of the Trump administration’s ongoing effort to reduce the burden of tax regulations. Its comprehensive review has already identified over 200 regulations that Treasury believes should be repealed, which will begin in the fourth quarter of 2017, according to a statement from the Treasury.

“This is only the beginning of our efforts to reduce the burden of tax regulations,” Mnuchin said. “Our tax code has been broken for too long, and this retrospective review, along with our efforts on tax reform, will ensure that we have a tax system that fosters economic growth.”

If you have questions about transitioning your closely held business to the next generation, please contact Jason Thompson at (317) 608-6694 or email

Employee Spotlight: Jason Thompson

Jason ThompsonAs one of the founding Partners of Sponsel CPA Group, Jason Thompson has led the firm’s Valuation and Litigation Services department since inception, helping clients find innovative solutions to challenging financial and legal issues. He provides executive-level counsel to business owners and investors across a broad range of industries, specializing in the valuation of privately held businesses, ownership interests and intangible assets.

A graduate of Indiana University with a bachelor’s degree in accounting, Jason places a strong emphasis on continuing education and expanding his areas of expertise. In addition to being a CPA for over two decades, he holds certifications as an Accredited Senior Appraiser (ASA), Certified Fraud Examiner (CFE), Financial Forensics (CFF) and Accredited in Business Valuation (ABV). Jason routinely provides consultation related to business valuation in mergers and acquisitions, in estate and gift tax compliance and planning and for an array of litigation related reasons. In addition to his skills as a valuation professional, he also performs the firm’s fraud and forensic accounting investigations and serves as an expert witness from time to time in accounting and financial related matters.

In 2008 he was named a Super CPA award by Indiana Business magazine. Active in the community, Jason volunteers his time as a board member for Noble of Indiana, a not-for-profit organization serving people with disabilities and their families.

What makes you different from your best competitor?

Jason ThompsonBy Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

I have often heard that it’s difficult to see your own weaknesses – especially in an organization of like-minded people. When everyone is committed to a common set of goals, there’s a tendency to overestimate strengths and downplay – or even ignore – weaknesses.

If you want your company to improve in what it’s doing, take a look at the blind spots. One mechanism to do this is to ask yourself what makes your organization different from your closest competitor.

As a business owner, you may constantly compare your business to other organizations in the marketplace, though usually from the perspective of: who’s landing the top clients, who attracts the top talent or who’s got the most revenue, etc.

Drilling down on this comparison a little deeper may shed some light on what makes your company different.  As a business owner, it shouldn’t be difficult to identify your biggest rival (closest competitor).  Next, make a list of the differences between your company and theirs. Ask questions like:

  • What do they do better than us?
  • What do we do better than them?
  • Why/how are they adding customers?
  • Why/how do their costs compare to ours?
  • Do they have a market niche we don’t?

This exercise can be humbling if your competitor is a larger entity with access to a broader range of resources. If this is the case, you are the small fish and they are the big fish, asking these sorts of comparative questions can help you identify opportunities you might not have previously explored. Keep in mind, a smaller enterprise is often more nimble, entrepreneurial and closer to customer relationships than large companies.

As you identify your differences, don’t be afraid to emulate the things your competitor does well. In areas they are weak, consider ways to develop your team’s expertise and offerings and fill that gap or be the “better” option!

Ego can sometimes get in the way of an exercise like this.  It’s healthy to take pride in your business’s capabilities and accomplishments. Just don’t let ego get in the way of improvement.

Challenge everyone in your office, especially younger team members.  Make sure their 30 -second elevator speech emphasizes how your company stands out in the crowd.  Simple things like a consistent message go a long way toward building perception.

Weaknesses within your business may be difficult to see, but if you ask the right kinds of questions and make the difficult comparisons, you’ll soon recognize weaknesses as opportunities to improve. Then maybe one day in the future, your company is the standard others compare themselves to.

It is OK to be a “secret admirer” of your competition.  Use that admiration to make your company BETTER!!!

If you have questions or comments, contact Jason Thompson at (317) 608-6694 or


IRS Regulations to Limit Gift and Estate Tax Valuation Discounts

Jason ThompsonBy Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

In August 2016, the Internal Revenue Service (IRS) followed through with its threats to impose new regulations affecting the valuation of closely-held business interests for gift and estate tax purposes. The net effect of these changes is to limit valuation discounts in the case of the transfer of family-owned businesses and assets.

Such discounts reduce the amount of the estate tax exemption applied in a transfer of an ownership interest, such as commonly made to children, grandchildren or other family members.

There has been a flurry of activity in the business valuation and estate and gift tax communities since the issuance of these proposed regulations. Much of it has been focused on understanding the impact of the proposed regulations and organizing the fight to prevent the proposed regulations from becoming final.

The American Society of Appraisers has recently issued talking points for use in expressing opposition to the proposed regulations. These serve to highlight the controversy the proposed regulations have sparked among the business valuation community, estate and gift tax advisors and family business owners.

The following is a listing of the ASA’s talking points:

  • The Proposed Regulations Unfairly Increase the Values of Fractional Interests in Family Controlled Businesses and Holding Companies for Estate and Gift Tax Purposes.

The result is a “stealth” tax increase of 25 to 50 percent (or more) in taxes. The root cause of the tax increase is the IRS’ institution of the discredited notion of “family attribution.”

  • IRS Replaces Fair Market Value with a New and Unknown Definition of Value – Counter to Its Own Standard.

Revenue Rulings 59-60 has long been clear on the issue of what standard of value is to be applied: The price at which a hypothetical willing buyer and seller at arm’s length would agree to buy/sell an interest for. Based upon the realities of the marketplace, the fair market value of a minority interest is not worth as much as that interest’s pro-rata share of the whole entity. This is because such interests do not enjoy control or marketability. These required valuation adjustments are referred to as “discounts.” The IRS now proposes the use of a new valuation theory for taxing intra-family estate and gift transfers, with the seller and buyer allowed to be known parties. Because of the lack of clarity in the proposed regulations, valuation discounts will either be reduced substantially or disregarded altogether. This renders useless all accumulated prior knowledge built up by decades of Tax Court precedent, appraisal education and experience and academic research.

  • The IRS’s Return of “Family Attribution” Has Been Rejected by the Supreme Court and the IRS Itself.

In Estate of Bright v. United States, the Supreme Court dismissed the IRS’s position that families will always work in concert and always agree on business and financial matters. A subsequent Revenue Ruling, 93-12, makes clear that discounts for lack of control cannot be denied simply because the interests are passed from one family member to another.

  • The Rule Treats Intra-Family Transfers Differently Than Those Involving Non-Family Third Parties.

The proposed rule applies only to transfers from one family member to another; meanwhile, non-family third parties can still claim the same discounts on similar estate or gift transfers. The IRS does not provide any reasoning as to why this disparate treatment exists.

  • The Proposal Would Override Limitations Placed on Interests in the Business – Including Those Imposed by State Law.

The IRS proposes – by regulatory fiat – to overturn both existing private party contractual agreements and various state laws by ignoring the marketability restrictions placed on interests when valuing them for taxation purposes.

  • The Impacts to Family-Owned Businesses Will Be Significant.

At a minimum, these businesses will delay capital investments or hiring as the available cash will go toward paying an increased tax bill. Worse, these businesses may take on more debt simply to pay the IRS. Finally, business owners may decide to sell or liquidate the business rather than continue on as a family-owned going concern. The last outcome is highly destructive, especially for small businesses.

  • Support the Protect Family Farms and Business Act!

The House bill proposed by Rep. Warren Davidson (R-Ohio) is H.R. 6100. The Senate bill proposed by Sen. Marco Rubio (R-Florida) is S-3436.

These talking points illustrate what is at stake for the family business should these proposed regulations become final.

If you have any questions about how the new regulations on estate and gift tax valuations could affect your business succession plans, please call Jason Thompson at (317) 608-6694 or email

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