A confluence of three factors make 2020 an ideal time for estate planning transactions for owners of private companies

  • Depressed Valuations. The COVID-induced drag on the global economy has reduced the fair market value of many private companies.
  • Low Interest Rates. Applicable federal rates (AFRs) are at historically low levels, allowing business owners to compound the benefit available from depressed valuations by making leveraged estate planning strategies more efficient.
  • Political Risk. As if 2020 had not thrown at us enough already, there is a presidential election coming up. There are no guarantees that the current lifetime exemptions and tax rates will persist.

As a result of these factors, many business owners are currently contemplating whether to engage in significant ownership transfers. For many high net worth individuals and family offices, complex ownership structures have evolved over time, typically involving multi-tiered entity organizations and businesses with complicated ownership structures and governance.

Mercer Capital has been performing complicated tax engagements for decades. In this article, we describe the processes that lead to credible and timely valuation reports. These processes contribute to smoother engagements and better outcomes for clients.

Defining the Engagement

Defining the valuation project is an important step in every engagement process, but when multiple or tiered entities are involved it becomes critical. It is insufficient to define a complicated engagement by referring only to the top tier entity in a multi-tiered organizational structure. The engagement scope should clearly identify all the direct and indirect ownership interests that will need to be valued. This allows the appraiser to plan the underlying due diligence and analytical framework and to design the deliverable work product.

For example, will the appraiser need to perform a separate appraisal at each level of a tiered structure? Or, can certain entities or underlying assets be valued using a consolidated analytical framework? Planning well on the front end of an engagement leads to more straightforward analyses that are easier to defend.

Collecting the Necessary Information

During the initial discussion of the engagement the appraiser will usually request certain descriptive and financial information (such as governing documents, recent audits, compilations and/or tax returns) to determine the scope of analysis needed to render a credible appraisal for the master, top-tier entity and the underlying entities and assets.

Upon being retained, one of the first things an appraiser will do is to prepare a more comprehensive information request list designed to solicit all the documentation necessary to render a valuation opinion. Full and complete disclosure of all requested information, as well as other information believed pertinent to the appraisal, will aid the appraiser in preventing double-counting or otherwise missing assets all together.

Information Needed for Complex Multi-Tiered Entity Valuation

Requested information for complex multi-tiered entity valuations typically falls into three broad categories:

  • Legal documentation. The legal structure and inter-relationships in complex assignments are essential to deriving reliable valuation conclusions. In addition to the foundational operating and other agreements, it is important to have current shareholder/member lists. A graphical organization chart is often a very helpful supplement to the legal documents and helps ensure that everyone really is “on the same page” regarding the objectives of the valuation assignment.
  • Financial statements. A careful review of the historical financial statements for each entity in the overall structure provides essential context for the cash flow projections, growth outlook, and risk assessment that are the basic building blocks for any valuation assignment. Depending on ownership characteristics and business attributes, it may be appropriate to combine financial statements for multiple entities to promote efficiency in project execution.
  • Supplementary information. For operating businesses, supplementary information may include financial projections, detailed revenue and margin data (by customer, product, region or some other basis), personnel information, and/or information pertaining to the competitive environment. For asset-holding entities, supplementary data may include current appraisals of real estate or other illiquid underlying assets, brokerage statements, and the like.

The ultimate efficiency of the project often hinges on timely receipt of all requested information. Disorganized information or data that requires a lot of handling or interpretation on the part of the appraiser adds to project cost, and more importantly, can make it harder to defend valuation conclusions that are later subject to scrutiny.

In short, providing high quality information in response to the appraiser’s request promotes a more predicable outcome with the IRS and with other stakeholders.

The Importance of Reviewing the Draft Appraisal

Upon completing research, due diligence interviews with appropriate parties, and valuation analysis, the appraiser should provide a draft appraisal report for review. The steps discussed thus far – careful planning and timely information collection – are not substitutes for careful review of the draft appraisal report. The complexity of many multi-tiered structures increases the need for relevant parties to review the draft appraisal for completeness and factual accuracy. Reviewers should read the draft report with numerous questions in mind:

  • Does the valuation analysis reflect the economic nature and value of the core assets at each respective entity level?
  • Are the respective assets and liabilities at each entity tier adequately described and captured in one form or another?
  • Does the draft report faithfully describe the inter-relationships among the various entities in the structure?
  • Does the report reflect a reasonable top-down or bottom-up sequencing that allows readers to understand how the overall structure works? Could you teach an outsider what this collection of entities and the underlying assets are by way of the valuation report?
  • If some of the entities have been combined for valuation purposes, do the groupings makes sense in terms of the nature of the assets and their operational character? Are the valuation methods applied reasonable and consistent from one asset grouping to another?
  • Are assets or liabilities that span multiple entities adequately reconciled? One entity’s asset may be another entity’s liability. In such cases, are the valuation treatments and results consistent from one entity to the next?
  • Are valuation discounts for lack of control and/or lack marketability are appropriate? If so, for which entities? Are the valuation discounts well-supported and applied at the appropriate place(s) with the tiered entity structure?
  • Does the report say what it does and does it do what it says? (Yogi Berra, where are you?)

Engagements involving complicated entity and operational structures are not easily shoehorned into typical appraisal reporting formats and presentation. Unique entity and asset attributes may require creative valuation techniques and heighten the need for clear and concise reporting of appraisal results. Regardless of the complexity of the underlying structure and valuation techniques, the appraisal report should still be easy to read and understand.


Mercer Capital has  been providing reliable appraisals for gift and estate planning efforts for nearly four decades. Over that time, we have completed many large valuation engagements for complex, multi-tiered entities.

We pride ourselves in differentiating our services and approach through careful pre-engagement planning, which allows us to meet client deadlines and avoid costly do-overs. We are committed to doing our part to improve the planning and decision-making processes of our clients and their advisors. To discuss in confidence any engagement requiring Mercer Capital’s customized valuation solutions, please contact any of our senior valuation professionals.