The Recipe for a Defensible Valuation and a Strong Business

The Recipe for a Defensible Valuation and a Strong Business

by | Mar 23, 2026 | Estate and Gift Tax Business Valuation

The “Great Eight” Ingredients

The IRS doesn’t just want a single number; they want to see your homework. Revenue Ruling 59-60 outlines eight specific ingredients that an appraiser must consider. Think of these as the recipe for a defensible valuation and a strong business:

  1. Nature and History: What does the business do? How stable is it? Buyers like predictability and growth with profits.  Does your history, staffing, risk management, supply chain, customers, etc. support predictable profitable growth?
  2. Economic Outlook: How is the general economy doing, and what’s the vibe in your specific industry?  Remember all ships float on a rising tide.
  3. Book Value: What is the financial condition of the business based on its balance sheet?  Strong companies can negotiate and pass on an offer.  Weak companies often have to take the offer on the table.
  4. Earnings Capacity: How much profit does the company actually make and more importantly how much can reasonably be expected to be made in the future.   Could it make more?  (If it could make more and you as the seller would like to get paid for that ability – prove it before the sale.)
  5. Dividend-Paying Capacity: Can the company afford to pay out dividends or other benefits to its owners?  Investors want to be paid too.
  6. Goodwill: Does the business have “intangible” value, like a famous brand name or a stellar reputation?  Can that brand be protected into the future?
  7. Previous Stock Sales: Have there been any recent sales of the company’s stock? 
  8. Market Price of Peers: What are similar, publicly traded companies selling for?  With the advent of quality private market data, it is a must to consider what similar private companies are selling for too. 

IRS Revenue Ruling 59-60 is Not Just for Lawyers

While estate lawyers use 59-60 to keep the IRS happy during a wealth transfer, these factors are incredibly useful for any business owner.  As I stated before, the ruling in a large part is the basis of modern business valuation. 

  • Selling Your Business: If you use the 59-60 framework, you’re looking at your company through the eyes of a “hypothetical willing buyer.”  It helps you spot weaknesses (like over-reliance on one key person) before you hit the market.  FYI: Sometimes owners can’t see the “forest of the leaves”.  Consider hiring someone to do this with you.
  • Partnership Disputes: When one partner wants out, 59-60 provides a neutral, “framework” for determining a proper valuation.[1] 
  • Divorce Proceedings: In many states, courts look to these factors to value a business during an asset split.[2]

The “Art” of the Business Valuation

One of the most refreshing things about Revenue Ruling 59-60 is that it admits valuation is not an exact science.

  • The ruling explicitly states that “a sound valuation will be based on all relevant facts,” but it also requires “common sense, informed judgment, and reasonableness.”

This is why two different appraisers might come up with two different numbers. It’s not just about plugging data into a spreadsheet; it’s about telling the story of the business and its risks.

Planning for 2026 and Beyond

Certainly 59-60 framework is useful when you “need” a business valuation for estate and gift, exit planning, litigation, or other purposes. 

More importantly, in our experience an annual review process that includes a business valuation where prior forecasts are reviewed and future forecasts are developed can be an eye-opening event for owners and management teams.  Properly done it brings together your team in a planning process and provides a “report card” on how the market views your progress and your company value.

 

[1] The “framework” provided by Ruling 59-60 must be applied in accordance with the Standard of Value provided for under state law and/or organizational documents.  All business valuations must consider purpose, user, and standard of value.

[2] Ibid

Bridging the Gap: A Loan Officer’s Guide to Purchase Price vs. Opinion of ValuePlaying for the Team

Bridging the Gap: A Loan Officer’s Guide to Purchase Price vs. Opinion of ValuePlaying for the Team

by | Feb 19, 2026 | Exit Planning Business Valuation & Growing Business Value

While not a common thing, as a loan officer, you’ve seen it happen: a motivated buyer and a ready seller bring you a signed Letter of Intent (LOI) with a $2M price tag, only for the independent appraisal (SBA or Conventional) to come back at $1.7M. 

This “valuation gap” can stall a deal or kill it entirely if not managed correctly. Understanding why these numbers diverge allows you to manage client expectations early and keep the underwriting process moving.

    Why the “Agreed Price” Rarely Matches the “Appraised Value”

    The purchase price is often a reflection of sentiment and strategy, while the business valuation is a reflection of market data and risk mitigation. Fair Market value business valuation is what “should” be.  Negotiation is closer to what it actually is.

    Here is where the confusion typically starts:

    Arm’s Length vs. Negotiated Pricing

    • The Buyer’s View: They may be paying a premium for “strategic fit”—perhaps the acquisition eliminates a competitor or provides a specific geographic footprint.
    • The SBA and Bank View: Appraisers must seek the “Fair Market Value” via an arm’s length standard. They look for what a typical buyer would pay, not what a specific buyer is willing to overpay for.

    The Complexity of Earnouts and Seller Financing

    • Deal Structure: Sellers often inflate the purchase price in exchange for carrying a note (seller financing) or accepting an earnout.
    • The Valuation Reality: SBA-approved appraisers generally value the business based on historical cash flows. The SBA discourages the use of forecasts.  Larger businesses may use forecasts, but they usually must restrict growth to proven levels.  They are often skeptical of “pro-forma” valuations based on future earnouts that haven’t happened yet. If the price is high because the seller is “betting on the future,” the appraisal likely won’t follow suit.

    The “Goodwill” Hurdle

    • Intangible Assets: Buyers often justify a high price based on brand equity or “blue sky.”
    • Scrutiny: While the SBA and Bank Policy allow for goodwill, the appraisal must tie that value to verifiable cash flow. If the “blue sky” isn’t supported by the last two or three years of tax returns, the appraiser may have to haircut that value, leaving a gap that the buyer must cover with additional equity

    Understanding “Overpayment Risk”

    From a credit perspective, the SBA views a price-to-value gap as a primary indicator of Default Risk.

    • Debt Service Coverage Ratio (DSCR): If a buyer overpays, they are effectively taking on more debt than the business’s historical earnings can comfortably support.
    • Collateral Shortfall: Since SBA loans are often under-collateralized by hard assets, the business valuation is the primary “security.” Overpaying means the bank is financing “air” that may not exist if the bank has to liquidate the business in two years.

    Why the Valuation is a Tool, Not a Roadblock

    When a valuation comes in low, it’s not just a compliance checkbox—it’s a protection mechanism for the bank, the SBA, and the borrower.

    When you encounter a valuation gap, use it as a pivot point for a “Value Conversation.” Whether it requires a price reduction, a larger down payment from the buyer, or a larger seller carry-back, the bank-required business valuation ensures the deal is built on a foundation of math rather than just optimism.

    Playing for the Team

    Playing for the Team

    by | Jan 20, 2026 | Exit Planning Business Valuation & Growing Business Value

    Playing for the team doesn’t mean losing your individuality. It means choosing to use your strengths in service of something bigger than yourself.

    Winning together feels different than winning alone. Shared wins last longer. They build pride, loyalty, and purpose. And they’re built one day at a time.

    So let’s break down what improving the team can look like—depending on how you show up.

      The Precise Player: Make It Clear, Make It Better

      Precise team members care deeply about accuracy, clarity, and quality. They notice the details others miss—and that matters more than people often realize.

      How Precision Improves the Team

      • Fewer mistakes
      • Clearer expectations
      • Stronger credibility with clients and stakeholders

      Daily Ways to Contribute

      • Review your work one more time before handing it off
      • Clarify assumptions instead of letting confusion linger
      • Document processes so others don’t have to guess
      • Ask, “Is this clear to someone seeing it for the first time?”

        The Innovative Player: See What Could Be

        Innovators bring energy and possibility. They question the status quo and imagine better ways of doing things.

        How Innovation Improves the Team

        • Keeps the team from getting stuck
        • Sparks new ideas and momentum
        • Encourages learning and adaptability

        Daily Ways to Contribute

        • Ask, “What if we tried this another way?”
        • Share ideas early—even if they’re not fully formed
        • Connect dots between unrelated problems or solutions
        • Encourage experimentation without fear of failure

        The Harmonious Player: Strengthen the Human Side

        Harmonious contributors focus on relationships, communication, and emotional awareness. They help teams work together, not just side by side.

        How Harmony Improves the Team

        • Builds trust and psychological safety
        • Reduces friction and misunderstandings
        • Helps people feel seen and valued

        Daily Ways to Contribute

        • Listen fully instead of waiting to respond
        • Acknowledge effort, not just outcomes
        • Address tension early and respectfully
        • Ask, “How is everyone doing?”—and mean it

        The Achieving Player: Move the Ball Forward

        Achievers bring focus, drive, and momentum. They care about progress and results—and they help turn ideas into action.

        How Achievement Improves the Team

        • Keeps goals visible and moving
        • Prevents paralysis by analysis
        • Reinforces accountability

        Daily Ways to Contribute

        • Set one clear priority for the day
        • Follow through on commitments
        • Help remove obstacles for others
        • Ask, “What’s the next best step?”

        Strong cultures don’t rely on heroic effort. They rely on consistent, intentional behavior.

        • Precision without innovation becomes rigid
        • Innovation without harmony becomes chaotic
        • Harmony without achievement becomes stagnant
        • Achievement without precision becomes risky

        But when all four are present—when people respect different ways of contributing—teams become resilient, adaptable, and purpose-driven.

        Pause, Look Back, Move Forward: The Power of Gratitude in Goal-Setting

        Pause, Look Back, Move Forward: The Power of Gratitude in Goal-Setting

        by | Dec 11, 2025 | Technical Business Valuation Topics

        Before you rush into planning your next quarter or next big initiative, pause. Look back. Take stock. Appreciate the progress you’ve already made. The gratitude you practice today becomes the foundation that supports tomorrow’s success. Want to make gratitude part of your team’s rhythm? Here are a few practical ways to start:

        • Host a “Wins & Lessons” Session:
          Before jumping into planning, hold a meeting dedicated to looking back at successes and takeaways from the past quarter or year.
        • Create a Gratitude Wall or Digital Board:
          Give employees a place—physical or online—to shout out teammates and acknowledge moments worth celebrating.
        • Send Personal Thank-You Notes:
          Leaders can make a big impact by sending thoughtful, specific thank-you messages to team members, clients, and partners.
        • Share “Grateful Moments” in Internal Comms:
          Add appreciation stories to newsletters, meeting kickoffs, or monthly updates.
        • Review Client Testimonials and Success Stories:
          Revisit positive feedback as a team to remind everyone how their work makes a difference.

        Gratitude isn’t just a warm, fuzzy feeling. It’s a powerful, strategic habit that can shape the future of your business. Here’s why slowing down to appreciate the journey before setting new goals is so valuable:

        It Builds Resilience and Positivity:
        Business can feel like a rollercoaster. There are highs, lows, surprises, and detours. When you look back at what your team has accomplished—the projects finished, the client problems solved, the tough moments you managed to navigate—you build a storehouse of positive reminders. That kind of mindset helps you stay steady and optimistic when you hit the next bump in the road.

        It Reveals Hidden Strengths:
        Taking time to recall what went well often uncovers why it went well. Maybe it was great teamwork. Maybe someone’s creative idea unlocked a solution. Maybe a process quietly carried the team through chaos. When you spot those strengths, you can intentionally use them again instead of constantly reinventing the wheel.

        It Boosts Employee Engagement and Retention:
        People want to feel seen and appreciated—simple as that. When leaders take time to recognize specific contributions, it builds a culture where people feel valued and connected. Employees who feel appreciated are more motivated, stick around longer, and become real partners in achieving future goals.

        It Strengthens Client and Partner Relationships:
        A genuine “thank you” goes a long way—not just inside your company, but outside too. Letting clients and partners know you appreciate their trust, flexibility, or collaboration deepens those relationships. Strong relationships make future goals easier to reach, whether that’s launching new projects, renewing contracts, or trying something innovative together.

        It Encourages a Culture of Learning:
        Even the tough moments—the failed attempts, the missteps, the headaches—hold lessons. Gratitude helps shift the mindset from “that went wrong” to “here’s what we learned.” This approach helps build a culture where challenges become stepping stones, not roadblocks.

        In today’s fast-moving business world, it’s easy to stay locked into “what’s next” and forget to look back at “what just happened.” We naturally focus on fixing things, improving things, and pushing toward the next goal. But taking a moment to reflect—to really appreciate the wins, the progress, and even the tough lessons—can make a huge difference in how you set and achieve future goals.

         

        Spotting the Red Flags: What the DOL Commonly Finds in ESOP Audits

        Spotting the Red Flags: What the DOL Commonly Finds in ESOP Audits

        by | Nov 19, 2025 | ESOP Business Valuation

        If you run a company with an ESOP, the idea of a Department of Labor (DOL) audit can feel a little intimidating. These reviews—handled by the Employee Benefits Security Administration (EBSA)—are meant to make sure your ESOP follows ERISA rules and that fiduciaries are acting in the best interests of employees.

        The DOL rarely explains why an audit starts, but common triggers include participant complaints, issues in your Form 5500, or simple computer targeting. And once an audit begins, certain problem areas show up again and again. Some lead to required fixes, and others can escalate into costly penalties or even litigation.

        Here’s a rundown of the issues the DOL most often flags in ESOP audits:

        1. Overpaying for Company Stock (“Adequate Consideration” Problems)

        This is the big one—and the most litigated. ESOPs aren’t allowed to pay more than fair market value for company stock, so the DOL takes a very close look at initial transactions and annual valuations.

        Common pitfalls include:

        • Flawed valuations: Think unrealistic projections, using the wrong valuation methods, ignoring key risks, or adding control premiums when the ESOP doesn’t actually have control. The DOL often brings in its own experts to challenge the numbers.
        • Weak trustee oversight: Trustees are expected to behave independently and actively engaged—not just rubber-stamping the appraiser’s work.
        • Conflicts of interest: If the appraiser has ties to management or selling shareholders, expect scrutiny. Particularly during transactions, the trustee should also be independent.
        • Rushed deals: Transactions pushed through quickly, often to meet tax deadlines, without enough time for due diligence, are a major red flag.
        1. Breach of Fiduciary Duty

        Trustees and other fiduciaries are held to a high standard, and valuation issues often overlap with fiduciary ones. But breaches show up in other ways too:

        • Not acting prudently: This includes failing to monitor service providers, not understanding the ESOP’s financial condition, not providing quality financials to the valuator, or making decisions without proper investigation.
        • Not putting participants first: Any action that benefits the company or selling shareholders at the expense of employees is a serious violation.
        • Improper expense handling: A common mistake is charging “settlor” expenses—like plan design or ESOP setup—to the plan, when they should be paid by the company.
        1. Administrative and Operational Errors

        Even well-run ESOPs can get tripped up by administrative details or poor communication among service providers.

        Some frequent issues include:

        • Incorrect share release calculations: Especially in leveraged ESOPs, incorrect formulas or amortization schedules can lead to major allocation errors.
        • Wrong participant allocations: If the plan’s definition of compensation isn’t followed precisely, employees may receive too many—or too few—shares.
        • Late deposits of contributions: If your ESOP includes a 401(k) feature, late deferral deposits are a huge audit trigger.
        • Failure to cash out terminated participants: Not doing so can inflate participant counts and unnecessarily trigger large-plan audit requirements.
        1. Reporting and Disclosure Problems (Form 5500)

        The Form 5500 is the DOL’s window into your ESOP. Mistakes here almost always attract attention.

        Common issues include:

        • Late or incomplete filings: Simple errors, but costly ones, due to steep daily penalties.
        • Wrong plan size classification: Marking a plan as “small” when it actually requires a full audit can lead to rejection and further examination.
        • Red flags on schedules: Inconsistent data, unexplained prohibited transactions, or excessive fees can all prompt follow-up questions.

        While ESOPs remain a powerful way to build employee ownership, today’s regulatory environment demands more than good intentions. Strong valuations, diligent fiduciary oversight, and tight administrative practices are essential to keeping your ESOP both compliant and healthy.