If you’ve ever looked at a business valuation and thought, “That number seems low,” you might have just stumbled upon one of the most powerful tools in estate tax planning.

In the world of gift and estate taxes, a lower valuation isn’t a bad thing—it’s a strategy. By applying specific “valuation discounts,” savvy business owners and their advisors can legally reduce a business value by anywhere from 10% to 45%. 

Here is how the logic of “Fair Market Value” translates into impressive tax savings. 

The “Willing Buyer” Logic

Business valuations for gift or estate purposes use fair market value as a standard of value.  Fair market value is a defined term in business valuation.  Fair market value stresses that the buyer and seller are both hypothetical and not necessarily the same parties.[i]

To understand discounts, you have to look through the eyes of the IRS’s favorite imaginary person: the Hypothetical Willing Buyer.

Imagine someone offers to sell you 10% of a family-owned landscaping business. You’ll have no say in how the company is run, you can’t force a dividend payment, if you work there you can still be fired, and you can’t easily sell your shares to someone else because there’s no public and a very limited private market.

Would you pay the full “sticker price” for those shares? Of course not. You’d demand a discount for the headache of having no control and no exit strategy. The IRS and courts recognize this economic reality. 

The Two Heavy Hitters: DLOC and DLOM

When we talk about reducing tax liability by approximately 35%, we are usually talking about stacking two specific types of discounts.

1. Discount for Lack of Control (DLOC)

This is often called a “minority discount.” If you own less than 50% of a typical partnership or corporation, you can’t fire the CEO, set your own salary, or sell the company’s assets.[ii] Because you lack “control,” the value of your specific shares is worth less than a proportional slice of the whole pie. 

• Typical Range: 5% to 25%

2. Discount for Lack of Marketability (DLOM)

If you own stock in Apple stock, you can sell it in seconds and receive the money in three days. If you own stock in “Bob’s Manufacturing, Inc.,” it might take you six to nine months to find a buyer and another three months to close the deal. That delay and uncertainty converting the business to cash create a “marketability risk.”

• Typical Range: 10% to 35% 

How the Math Works (The “Stacking” Effect)

Discounts aren’t added together; they are applied sequentially. This is where the big savings happen.

Let’s look at a quick example:

• Enterprise Equity Value:  The control, marketable value of the equity of a company is $10,000,000.  You own a 10% lack of control, unmarketable share of a business.
• Your pro-rata value: before discounts is $1,000,000.  But you have no control.  In addition, private companies are hard to sell and take time. 
• Apply DLOC (20%): The value drops to $800,000.
• Apply DLOM (25%): You take 25% off the new $800,000 figure, bringing it down to $600,000.

In this scenario, with properly performed work, you’ve legally reduced the taxable value of that business interest by 40%. If you are gifting that stock to your children, you just moved $1M worth of value while only using $600k of your lifetime gift tax exemption.  Now, any future value growth is in your children’s trust or accounts, not yours. 

The Legal “Guardrails”

While these discounts are powerful, you can’t just pick a number out of thin air. The IRS and the courts are highly skeptical of “round numbers” that aren’t backed by data. To make a discount stick, you need a professional valuation report from a qualified appraiser that properly cites and calculates one or more of the below methods[iii] to determine marketability:

• Restricted Stock Studies: Data showing what investors pay for non-tradable shares.
• Pre-IPO Studies: Comparing prices of stock before and after a company goes public.
• The Mandelbaum Factors: A specific set of legal criteria used by courts to judge marketability.
• Statistical Studies:  Modeling of various Put Option Contracts are used to justify marketability.
• QMDM, Stout DLOM Calculator, Stout and Aldering/Hitchner have developed methodologies using Stout data. 

With tax laws constantly under review many families are using these discounts to “freeze” the value of their estates today. By gifting discounted shares now, all the future growth of that business happens outside of your taxable estate.  Minimize taxes with thoughtful planning. 

One of the most common—and most misunderstood—issues I see when working with ESOP companies is the long-term impact of repurchase obligations. While repurchase liability doesn’t show up on the balance sheet and isn’t classified as debt, it represents a very real future cash requirement that can materially affect liquidity, financing flexibility, and ESOP sustainability if it is not actively managed.

Ultimately, the key question every ESOP company needs to answer is how it can balance competing demands: funding repurchase obligations, servicing debt, maintaining operations, and continuing to invest in growth.

At its core, a repurchase obligation is the company’s requirement to buy back shares from ESOP participants when they become entitled to distributions—most commonly at retirement, death, disability, termination, or through diversification elections. Those shares must be repurchased at fair market value as determined by an independent appraiser. The challenge is that the timing and amount of these future payments are inherently uncertain, driven by employee demographics, stock value growth, and plan design decisions that may have been made years earlier.

This is why repurchase obligation studies are so important. A well-prepared study is not just a spreadsheet exercise. It is a long-term projection of expected distributions and the related company cash requirements, designed to help management and trustees understand how today’s decisions affect tomorrow’s liquidity. In my experience, companies that treat repurchase planning as an ongoing strategic exercise are far better positioned to align ESOP outcomes with broader corporate goals such as earnings stability, cash flow management, and long-term value creation.

Plan design and distribution policy play an outsized role in shaping repurchase outcomes. Decisions around when distributions begin, whether they are paid in lump sums or installments, and whether participant accounts are segregated into cash can dramatically accelerate or defer cash demands. Diversification rights add another layer of complexity, as participant elections are influenced by factors such as company stock performance, communication and education efforts, and the availability of other retirement assets. Similarly, the method used to satisfy repurchases—recycling, redeeming, releveraging, or a combination—has meaningful implications for cash flow, share allocation timing, and future valuation.

From a credit and valuation standpoint, repurchase obligations sit in an unusual place. Lenders increasingly focus on projected repurchase payments when assessing free cash flow and covenant compliance, and many banks now expect to see a formal repurchase obligation study as part of their underwriting process. At the same time, repurchase liability should not be treated like traditional debt in valuation analyses. Subtracting it directly from equity value risks double-counting, since the obligation ultimately represents the value of the company’s own shares. The more appropriate approach is to understand how repurchase obligations affect future cash flows, leverage capacity, and the company’s ability to reinvest in the business.

Thoughtful repurchase planning—grounded in realistic assumptions and revisited regularly—goes a long way toward ensuring that the ESOP remains a sustainable and value-enhancing ownership structure for both current and future participants.

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