The Timing is Right for Large Gifts in Light of Pandemic-Induced Lower Equity Values

If you wait until it’s too late, it’s too late. I wrote those words a number of years ago talking about fixing buy-sell agreements that have inappropriate valuation mechanisms. Those words can be apropos today in the current Coronavirus pandemic.

Equity values are down since late February in the public marketplace, and the values of many, most, private companies are down as well, as a result of this pandemic. This reduction in value creates a significant opportunity. Assume that you, as a business owner, or a client of yours, if you’re an advisor, were planning on making a gift immediately prior to the crash. A valuation was done, and value was determined at the financial control / marketable minority level of value. The marketability discount was 30%. Under those circumstances, if you made a maximum exclusion or exemption gift of $11.4 million, then you would shift $16.3 million of value into the future.

Immediately after the crash, let’s assume that the business owner would consider making that very same $11.4 million gift. If equity value for the company is down 15%, it will shift an extra $2.9 million into the future, assuming that the company’s value recovers to its normal path at some point in the future. And that has always happened in every previous recession.

Assume that equity value was down 20%. You’ll shift an extra $4.1 million, or an incremental benefit of 25%. Now that’s pretty powerful! Assume one more thing – that equity value is down 25%. You’ll shift an extra $5.4 million or an additional third. You do that by gifting more shares at the same $11.4 million gift amount. So if you make a smaller gift, the percentage benefits would be the same under my assumptions. So if you as a business owner, or your clients, if you are an advisor, intend to make a gift, a significant gift, now is a good time to take advantage of the current Coronavirus pandemic. This opportunity will not last forever. I remember Black Monday back in the late 1980s. There was a significant opportunity there and a number of clients took advantage of it. The same opportunity is here today, and if you wait until it’s too late, it’s too late.

This is Chris Mercer with another Valuation Video. Be safe and be well and, until we meet again, Good Day!

Please note: I reserve the right to delete comments that are offensive or off-topic.

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