Corporate Valuation, Auto Dealerships
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September 30, 2021

Tax/Estate Planning Cheat Sheet for Auto Dealers

Winds of Change?

Benjamin Franklin famously said that the only things certain in this life are death and taxes. While both may be certain, taxes are always subject to change.

Last fall, we wrote a blog post about the estate planning environment for auto dealers and other industries. In that post, we highlighted the prevailing conditions that existed in the marketplace that would enable auto dealers to capitalize on executing any estate planning opportunities. Those conditions included opportunities for depressed valuations caused by uncertain operational results (at the time), low interest rates, and changing political forces caused by the Presidential election.

Fast forward to Fall 2021 and while some of these conditions have changed, rumors of potential tax changes have finally re-surfaced nearly three-fourths of the way through the first year of the Biden Administration.

Earlier this month, President Biden and Congress introduced the Build Back Better Act (“BBB Act”). After its introduction, the House Ways and Means Committee commented and circulated a draft of many of the proposed policies. A brief synopsis of the entire BBB Act from BKD CPAs and Advisors is provided here.

In this post, we focus on four particular proposals that impact estate planning and business valuations for auto dealers (and other industries): 1) Estate Tax / Lifetime Exclusion; 2) Corporate Income Tax Rates; 3) Capital Gains Rates; and 4) Valuation Discounts for Passive Assets.

Estate Tax/Lifetime Exclusion Amount

The Estate Tax / Lifetime Exclusion Amount is also referred to as the Generation Skipping Transfer Tax Exemption. This concept consists of the amount of an estate that is subject to be transferred free from taxes either during the lifetime of an individual/couple or at death.

  • Current Status: $11.7 million per individual or $23.4 million for a married couple as stated in the Tax Cuts and Jobs Act (“TCJA”) for gifts made between January 1, 2018 and December 31, 2025. Based on these figures, all estates under these amounts can be transferred during the lifetime or at death without incurring any estate taxes.
  • Current Proposal: Revert back to $5 million per individual adjusted for inflation to arrive at a figure of approximately $6.02 million per person or $12.04 million for a married couple.
  • Effective Date of Change: January 1, 2022
  • Valuation Impact: If enacted, the current proposal would now lower the lifetime annual exemption to $12.04 million for married couples, nearly cutting the exclusion in half. Estates with a value over $12.04 million would now be subject to tax on the amount exceeding $12.04 million.
  • Who Should Consider: Individuals who anticipate their estate may exceed the lower threshold of $12.04 million should consider executing estate planning strategies to transfer that wealth before the BBB Act is passed. Current estates with values exceeding $23.4 million or those estates that have not utilized the full prior lifetime annual exclusion amount, should also consider executing estate planning strategies before that heightened amount is reduced. The reduced exclusion amount also increases the number of affected people. Someone owning a business worth $15 million could now benefit from tax planning strategies that previously may have been less concerned when they fell below the threshold established by the TCJA.

Corporate Income Tax Rates

Corporate income tax rates are the amount of taxes paid on profits earned by a corporation.

  • Current Status: Flat rate of 21%, reduced by the TCJA
  • Latest Proposal: Graduated rates with a top rate of 26.5%
  • Effective Date: January 1, 2022
  • Valuation Impact: Business valuations of auto dealerships are generally impacted by three broad overall assumptions: expected annual cash flows, growth of said cash flows, and risks to achieve those cash flows. A proposed increase in the corporate income taxes would reduce the annual cash flows of an auto dealership simply by the fact that income tax rates are higher. We saw the reverse of this trend when income tax rates were lowered by the TCJA. While many auto dealerships are organized in entities that consist of S Corporations, Limited Liability Companies, and Partnerships, the corporate income tax assumption still impacts the business valuation. We won’t belabor the mechanics of a business valuation in this post, but effectively the hypothetical earnings of a business are tax affected to a C Corporation equivalent basis since the assumptions for the discount and capitalization rates (the risks associated with achieving expected cash flows) are derived from public C Corporations.
  • Who Should Consider: As briefly discussed above, income tax rates comprise one of the assumptions in a business valuation. On its surface, the proposed increase in corporate income taxes will certainly reduce expected the after-tax earnings of an auto dealership, all other things being equal. However, other prevailing industry conditions, such as heightened profitability due to operational efficiencies, might mitigate the overall impact caused by increased tax rates. The opposite was true in 2017.

Capital Gains Tax Rate

The capital gains rate is the tax rate paid on the disposition of an asset. Rates can differ based on the holding period of the asset prior to disposition and are often bifurcated into short-term (one year or less) or long-term (longer than one year) rates.

  • Current Status: Rates of 15% to 20% + 3.8% surtax on net investment income
  • Latest Proposal: Top rate of 25% + 3.8% surtax on net investment income for tax year 2022
  • Effective Date: Transactions occurring after September 13, 2021, would be subject to new rates.  Transactions occurring prior to September 13, 2021 would be subject to current rates.
  • Valuation Impact: Most business valuations do not calculate or consider the net amount received after a sale or disposition of the company or asset because the premise of these valuations is a going concern. However, we know business owners are definitely interested in the proceeds that ultimately hit their bank account.
  • Who Should Consider: Auto dealers that are contemplating whether to sell their dealership or continue to hold and operate should consider this potential rate increase. Dealers are currently experiencing record profits but also face challenges with the inventory shortages caused by suspended manufacturing from the pandemic and the microchip shortage. While it can be hard to let go when profits are rolling in, there are long term concerns surrounding the increasing capital costs of developing and maintaining digital platforms to compete with the public auto groups and larger private groups. Many dealers are choosing to sell, as evidenced by the current white hot auto dealer M&A market. If the BBB Act passes, auto dealers that sell in 2022 can expect fewer after-tax dollars from a sale or disposition due to higher capital gains tax rates, all other things being equal.

Valuation Discounts for Passive Assets

Business valuations of auto dealerships, real estate holding companies, and related businesses typically consist of determining the value of the entire business, as well as the value of a particular interest in the business. Often the subject interest comprises less than 100% of the total business and exhibits elements of lack of control and marketability. As such, discounts for lack of control, lack of marketability, and lack of voting rights are often applicable and determined to reduce the fair market value of the overall pro rata value of the subject interest.

  • Current Status: Valuation discounts for lack of control, lack of marketability, and lack of voting rights are allowed, but often require substantiation, quantification, and defense by a business appraiser communicated in a formal appraisal report.
  • Latest Proposal: The current version of the BBB Act proposes to eliminate valuation discounts for an entity’s “non-business,” or passive, assets. The BBB Act defines “non-business” or passive assets as cash, marketable securities, equity in another entity, real estate, etc. Further, passive assets are those assets that are held for the production or collection of income and are not used in the active conduct of a trade or business. Passive assets which are held as part of the reasonably required working capital of a trade or business are also excluded. Real property is excluded from this rule if real property assets are used in the active conduct of real property trade or business in which the transferor actively and materially participates. Examples include real property used for rental, operation, and management, among others.
  • Effective Date: January 1, 2022
  • Valuation Impact: In a world where combined discounts for lack of control and marketability can range from 25-45%, this is a material impact. Passage of this piece of the legislation in its current form may not have a dramatic impact on the business valuation of dealership operations, which would still be subject to discounts. However, many auto dealerships carry excess cash or working capital in order to smoothly run operations or provide cushions in down periods. If the BBB Act were to interpret that all cash or working capital exceeds the “guide” figure on the dealer financial statement, this could inflate both the total value of the business as well as the portion attributable to passive assets, which would not be subject to discounts. Many auto dealers currently hold heightened levels of cash and marketable securities as a result of increased profitability and retainage of any PPP funds and loan forgiveness. Many of our auto dealer clients also own the operating real estate for the dealership in a separate asset holding company. These proposed rules could also jeopardize the applicable discounts for lack of control and marketability in those entities for any marketable securities or “non-business” or passive assets.
  • Who Should Consider: If these discounts are eliminated for “non-business” or passive assets, auto dealers owning both types of entities, operating dealerships and real estate holding companies, should consider implementing and executing estate planning strategies. If all the discounts (not likely) or the discounts on “non-business” or passive assets are eliminated, the resulting business valuation of a subject interest in either of these types of entities will be dramatically higher. In turn, the overall values of the estates of auto dealers or the net value of transfers could be greatly increased for transfer tax purposes.

Conclusions

Just as death and taxes are the only certain things in life, another relevant adage is that change is inevitable. As the BBB Act and proposals from the House Ways and Means Committee start to evolve, there are numerous tax and estate planning implications.

While the final version of the Act will look almost certainly different than the current proposals for each provision, changes to existing rates and policies are anticipated. Fall 2021 is shaping up to be a busy estate planning season.

Seek qualified professionals to assist you with your estate planning, from the attorneys determining and drafting the plan to the valuation professional providing the valuation. Not all valuations and valuation professionals are created equal. The role of all of the professionals in your estate planning process should be to protect the integrity of the proposed transaction. Often when these transactions are challenged, they are challenged based on the formation factors or the quality/conclusion of the valuation.

Contact a professional at Mercer Capital to assist you and your attorney with your valuation needs involving your estate planning.

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The Role of the Third Appraiser
The Role of the Third Appraiser
After watching some controversial calls unfold this past weekend during the NFL playoffs, I couldn’t help but draw the correlation between throwing the challenge flag and looking for a third appraiser. Overtime in a playoff game, win or go home, the situation is as intense as it gets. Similarly, when a buy-sell agreement calls for a third appraiser, the stakes are high and it is fairly late in the game.
January 2026 | Making Buy-Sell Agreements Work: Valuation Mechanisms and Drafting Pitfalls
Value Matters® January 2026

Making Buy-Sell Agreements Work: Valuation Mechanisms and Drafting Pitfalls

Executive SummaryBuy-sell agreements are a cornerstone of planning for closely held businesses and family enterprises. Advisors spend significant time addressing ownership transitions, funding mechanisms, and tax considerations. Yet despite their importance, valuation provisions in buy-sell agreements are often treated as secondary drafting issues. Too often, they are boilerplate clauses that receive far less scrutiny than they deserve. When buy-sell agreements fail, valuation provisions are often the root cause.This article is the first in a two-part series examining how buy-sell agreements function in practice and why so many fall short of their intended purpose. Part I focuses on the valuation mechanisms commonly used in buy-sell agreements – fixed price, formula pricing, and appraisal-based processes – and explains the structural weaknesses that often undermine them. Drawing on our extensive valuation experience, we offer a practical framework for designing valuation provisions that are more likely to produce fair, predictable, and workable outcomes when a triggering event occurs.Part II will address what is required for buy-sell agreement pricing to be used to fix the value for gift and estate tax matters, including the requirements of Internal Revenue Code §2703 and guidance from key court cases such as Estate of Huffman and Connelly. Together, these articles are intended to help estate planners move beyond theoretical drafting and toward buy-sell agreements that withstand both real-world and IRS scrutiny.Common Buy-Sell Valuation MechanismsMost buy-sell agreements fall into one of four categories based on how price is determined:Fixed priceFormula pricingMultiple appraiser processSingle appraiser processEach approach has perceived advantages, but each also carries structural weaknesses that estate planners should carefully evaluate.Fixed-Price AgreementsFixed-price buy-sell agreements establish a specific dollar value for the business or ownership interests based on the owners’ agreement at a point in time. Their appeal lies in simplicity. The price is clear, easily understood, and inexpensive to administer. In theory, fixed-price agreements encourage owners to revisit and reaffirm value periodically.In practice, however, fixed prices are rarely updated with sufficient frequency. As the business evolves, the fixed price may become materially understated, overstated, or – by coincidence – approximately correct. The fundamental problem is not the use of a fixed price, but the absence of a reliable and consistently followed process for updating it. When the price becomes stale, incentives become misaligned. An unrealistically low price benefits the remaining owners, while an inflated price benefits the exiting owner. These distortions undermine fairness and often surface only after a triggering event, when renegotiation is least likely to succeed.Formula Price AgreementsFormula pricing agreements determine value by applying a predefined calculation, often based on financial statement metrics such as EBITDA multiples, book value, or shareholders’ equity. These agreements are frequently viewed as more objective than fixed prices and are attractive because they appear to adjust automatically as financial results change.The perceived precision of formulas is often illusory. Over time, changes in the business model, capital structure, accounting practices, or industry conditions can render a once-reasonable formula obsolete. Even when formulas are recalculated mechanically, they may fail to reflect economic reality (book value as a formula is a prime example of this). More importantly, most formula agreements lack guidance on when or how the formula itself should be revisited. Without periodic reassessment, formula pricing can embed significant inequities into the agreement while giving shareholders a false sense of certainty of fairness. Formula price agreements also fail to account for any non-operating assets that may have accumulated on the balance sheet. Valuation Process AgreementsValuation process agreements defer the determination of price until a triggering event occurs and rely on professional appraisers to establish value at that time. These agreements generally fall into two categories: multiple appraiser processes and single appraiser processes.Multiple Appraiser ProcessUnder a multiple appraiser process, each side appoints its own appraiser to value the business following a triggering event. If the resulting valuations differ beyond a specified threshold, the agreement typically calls for the appointment of a third appraiser to resolve the difference or render a binding conclusion.While this approach is intended to ensure fairness through balanced input, it often introduces uncertainty, delay, and cost. The final price, timing, and expense of the process are unknown at the outset. In addition, even well-intentioned appraisers may be perceived as advocates for the parties who selected them, complicating negotiations and eroding confidence in the outcome. For family-owned businesses in particular, the multiple appraiser process can unintentionally escalate conflict at a sensitive moment.Single Appraiser ProcessUnder a single appraiser process, one valuation firm is designated, either in advance or at the time of a triggering event, to perform a valuation. This approach is generally more efficient and cost-effective and avoids dueling opinions. When valuations are performed periodically, it can also make outcomes more predictable well before a triggering event occurs. Its effectiveness, however, depends entirely on careful advance planning and drafting.A More Effective Framework: “Single Appraiser: Select Now, Value Now and Annually (or Periodically) Thereafter”Given the shortcomings of traditional valuation mechanisms, is it possible to design a buy-sell valuation process that reliably produces reasonable outcomes? We believe it is.Based on extensive buy-sell agreement related valuation experience, we recommend a framework built on three principles: selecting the appraiser in advance, exercising the valuation process before a triggering event, and careful drafting of the valuation language in the agreement. 1. Retain an Appraiser NowEstate planners and other attorneys who draft buy-sell agreements should encourage clients to retain a qualified business appraiser at the outset, rather than waiting for a triggering event. Conducting an initial valuation transforms abstract agreement language into a concrete report that shareholders can review, understand, and question. This process reveals ambiguities in the agreement, clarifies expectations, and allows revisions to be made when no party knows whether they will ultimately be a buyer or a seller.This “Single Appraiser: Select Now, Value Now and Annually (or Periodically) Thereafter” approach offers several advantages:The valuation process is known and observed in advanceThe appraiser’s independence is established before any economic conflict arisesValuation methodologies and assumptions are understood by all partiesThe initial valuation becomes the operative price until updated or conditions changeAmbiguities in valuation language are identified and corrected earlyFuture valuations are more efficient, consistent, and less contentious2. Update the Valuation Annually or PeriodicallyStatic valuation mechanisms do not work in a dynamic business environment. Annual or periodic valuation updates help align expectations and reduce the likelihood of surprise or dissatisfaction when a triggering event occurs. In practice, disputes are more often driven by unmet expectations than by the absolute level of value. Regular valuations promote transparency and reduce friction.3. Draft Precise Valuation LanguageEven the best valuation process can fail if the agreement lacks clarity. Attorneys drafting buy-sell agreements should ensure that the agreements address, at a minimum:Standard of value (e.g., fair market value vs. fair value)Level of value (enterprise vs. interest level; treatment of discounts)Valuation date (“as of” date)Funding mechanismAppraiser qualifications (making certain to use business appraiser qualifications. For example, a “certified appraiser” refers to a real estate appraiser, rather than a business valuation expert.) Applicable appraisal standardsAmbiguity on any of these points materially increases the risk of divergent interpretations and unsuccessful outcomes.ConclusionBuy-sell agreements fail not because valuation is inherently subjective, but because valuation provisions are often left ambiguous, untested, or static. Estate planners and other attorneys who draft buy-sell agreements play a critical role in preventing these failures. By selecting appraisers in advance, exercising valuation processes periodically, and carefully drafting valuation language, advisors can dramatically improve the likelihood that a buy-sell agreement will function as intended.When valuation mechanisms are designed with the same rigor as tax and estate plans, buy-sell agreements can become durable planning tools capable of delivering predictability, fairness, and continuity when they are needed most. And the buy-sell agreement pricing may even be able to be used to fix the value for gift and estate tax filings. We will discuss this in Part II.For advisors who want to delve deeper into valuation concepts, planning strategies, and practical applications in estate and business succession planning, we recommend Buy-Sell Agreements: Valuation Handbook for Attorneys by Z. Christopher Mercer, FASA, CFA, ABAR (American Bar Association), written by our firm’s founder and Chairman. This book offers a thorough treatment of valuation issues and provides example language for consideration by attorneys when drafting buy-sell agreements that contain language important to the valuation process.
December 2025 SAAR
December 2025 SAAR
The U.S. auto industry closed 2025 with modest sequential improvement, surpassing 16 million units for the first time since 2019. While volumes stabilized late in the year, continued year-over-year declines, rising incentives, and uneven inventory levels across brands highlight a market that is normalizing rather than accelerating. As the industry moves into 2026, disciplined inventory management and margin preservation will be critical drivers of dealer performance and franchise value.

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