How to Secure your Business Legacy: Before It's Too Late

Estate planning isn’t just about creating a will or trust—it’s about preserving wealth, ensuring smooth wealth transfer, and minimizing potential conflicts among heirs. For business owners, one of the most challenging aspects is valuing minority and non-marketable shares. These shares often make up a significant portion of a closely held or private business, yet their value is not as straightforward as publicly traded shares. Understanding their proper valuation is critical for accurate estate planning.

What Are Minority and Non-Marketable Shares?

• Minority Shares: These represent ownership of less than 50% of a company. They do not provide control over management or strategic decisions.
• Non-Marketable Shares: These are shares that cannot easily be sold or transferred to outside buyers due to restrictions, lack of a public market, or company agreements.

Because of these limitations, their fair market value is usually lower than that of majority, marketable shares.

Why Proper Valuation Matters in Estate Planning

1. Minimizes Estate Taxes: Proper valuation ensures CRA recognizes a lower fair market value, potentially reducing estate taxes.
2. Prevents Disputes: Accurate valuations create fairness among heirs, especially if shares are divided or transferred.
3. Supports Buy-Sell Agreements: Helps enforce agreements where remaining owners buy out heirs’ shares.

Common Valuation Adjustments

To reflect the lack of control and marketability, experts typically apply:

1. Minority Discount: Reduces the share value because minority owners cannot influence key business decisions.
2. Discount Lack of Marketability (DLOM): Accounts for the difficulty of selling shares in a private market.

These discounts often range from 10% to 40%, depending on the company’s size, liquidity, and industry.

Valuation Methods Used

1. Income Approach: Projects future cash flows and applies discounting to present value. Often used for profitable, ongoing businesses.
2. Market Approach: Compares the business to similar companies with known transactions. Adjustments are made for lack of control or marketability.
3. Asset-Based Approach: Values the company based on net assets minus liabilities. Useful for asset-heavy businesses.

Professional appraisers often combine multiple methods to create a defensible and accurate valuation.

Tips for Business Owners

• Hire a Chartered Business Valuator: Look for someone experienced in estate planning and private business valuations.
• Document Everything: Maintain agreements, company bylaws, and financial statements for transparency.
• Update Regularly: Business value changes over time, so valuations should be updated before major transfers or estate events.
• Integrate With Estate Plan: Ensure that valuations align with trusts, wills, and buy-sell agreements.

Expert Insight

Valuing minority and non-marketable shares is not just a financial exercise—it’s a critical component of estate planning strategy. Proper valuation ensures fairness, reduces tax exposure, and protects the family legacy. By understanding the nuances of minority and non-marketable shares and working with professional appraisers, business owners can make informed decisions that preserve wealth for future generations.

Ensure Fair Distribution Among Heirs. Call Troy Valuations Today and Start Your Estate Planning Strategy With Expert Advice.