Business owners call me with all kinds of what’s-my-business-worth questions. It’s amazing that most business owners don’t have a clue as to the real value of their businesses.
You’ll like this story. A column reader (Joe) called to hire our firm to help him prove that book value was the right price to be used to buy out his 50% partner (Ralph). Joe was willing to pay $5 million for Ralph’s half of the business. (Book value was almost exactly $10 million). Ralph wanted $6 million and not a penny less.
Joe sent us a small stack of financial data. Our valuation of the business clearly showed that the cash flow of the business would easily pay off the $6 million price. Fact is the total business had a real fair market value in the range of $14 million to $16 million. Joe — although he didn’t think it or know it until we did a proper valuation — actually was getting a bargain purchase at $6 million.
On the other hand, if Ralph had hired a professional business appraiser, he would have asked for (and been entitled to) a $7 million to $8 million price.
Interestingly enough, the Joe/Ralph scenario was played out in the courts back in 1992 (Lauder vs. Commissioner, T.C. Memo, 1992-736). Here’s the story.
Joe Lauder (his real name) entered into a buy/sell agreement with his family. The price was book value. The court held that the agreement was binding while Joe was alive and after he died. It also held that the agreement served the legitimate business purpose of preserving family ownership and control of the corporation.
But for estate tax purposes, the court ruled that the book value did not reflect the price that would have been negotiated by two unrelated parties. The book value was only $615 per share and was the value Lauder’s estate wanted to use. Thumbs down, ruled the court, pinning a $1,485 per share value as determined by a professional appraiser.
What’s the lesson to be learned from these two real-life stories? Forget about book value when you want to value your business. Whether you are buying or selling a business or want to whip the IRS for tax purposes, work with a professional appraiser.
Maximize travel deductions
Traveling is fun when the trip is deductible. But just what expenses are deductible? And how much? Here’s a rundown of what the law allows.
Business travel: Business trips are fully deductible. But expenses for meals and entertainment incurred while you’re traveling on business are only 50% deductible. If you mix business with pleasure, you must show that the trip was primarily for business reasons. This is an all-or-nothing issue. There’s no travel deduction if business isn’t the primary purpose of your trip. So keep a log or diary that clearly shows the business reason for the trip — whom you saw, when, why, where, what you discussed and results.
Want to bring your spouse along? OK, but you may only deduct the cost of traveling alone unless your spouse’s presence has a real business purpose. Answering the phone, typing, etc. won’t do. Examples of what works: If you and your spouse jointly own the business, or if the trip is to a country where your spouse speaks the language and you don’t. In addition, your spouse must be an employee of your company.
Luxury water travel: Special rules apply to business travel by ship. You can deduct twice the highest daily allowance for U.S. travel by federal government employees. Since this per diem amount changes from time to time, have your accountant check the amount when you are ready to take a trip. If the per diem amount is, say, $155, you can deduct up to $310 per day of your cruise expenses. The 50% rule for meals and entertainment doesn’t apply if these expenses are not itemized on your tab for the cruise.
Travel for education: The cost of a business education seminar is deductible and so is the cost of getting there and back. Sorry, you are not entitled to any deduction for attending investment seminars. Only costs of seminars relating to your trade or business are deductible.
Travel for charity: Happily, you may still claim a charitable deduction for the cost of traveling on behalf of a charitable organization. But the deduction is barred if the trip involves a significant element of personal pleasure, recreation or vacation. Tax break: If a trip qualifies, all related costs are deductible, including 100% of your meals.
Travel for medical reasons: You can deduct the cost of travel for medical reasons, but only to the extent your total medical expenses deduction exceeds 7.5% of your adjusted gross income. When a patient is too young or too ill to travel alone, the cost of a traveling companion is deductible. It’s not fair, but meals during your medical stay are not deductible. Lodging expenses are limited to $50 per night per person, and you must show that the overnight stay is essential to receiving your medical treatment.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 300 S. Riverside Plaza, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].