Real Deals versus Tax Deals

This post concerns appraisals in contemplation of sales of businesses – 100%, control, or minority – to third parties; i.e. M&A or buy-in/buy-out transactions that are going to be real deals, not sales, gifts or transfers to family members for estate or gift tax purposes.

 “Real deals” are very different from family member transactions. In real deals, sellers want high prices and buyers want low ones.  In family deals, sellers want low values.  Buyers want high values (in the future).  So the fundamental motivations of the parties are not the same.

 Moreover:

 Real deals imply the investment standard of value – value based on the buyer’s or seller’s specific attributes or desires with real money changing hands.  Tax related deals involve fair market value – based on any willing buyer or seller, and hypothetical in terms of purchase or sale consideration (if gifts are being made).

1. Real deals include synergy, tax deals do not. 
2. Real deals are negotiated; tax deals are based on our independent appraisals.
3. In real deals, fair market value-related concepts like level of value (whether discounts for lack of control or marketability apply) are negotiated.  Tax deals follow the relevant Revenue Rulings.
4. In real deals, value is not necessarily an amount certain.  Contingent payments (like earn outs and escrows) are often part of them.  In tax deals, values have to be stated as single numbers.
5. In real deals, there can be a great deal of structuring to achieve favorable tax treatments.  Fair market deals restrict this.
6. In real deals, we can act as non-objective consultants, helping clients get the best price.  In tax deals, we have to be objective appraisers.  In both cases, we have to disclose this.
7. In real deals, there is no requirement that Revenue 59-60 be followed.  For example, many of the eight factors considered routinely in tax deals may be ignored.
8. Fair market value reflects the price willing and buyers would negotiate: it is an end result.  It is the minimum a seller and the maximum a buyer should accept.  In real deals, our appraisals are often ammunition for the parties to start negotiations, not necessarily where they should end up.

 The moral of this story is simple: be very cautious about performing fair market value appraisals when helping clients with real deals.  They involve different standards of value and have many other respectively unique aspects.