Small Business Valuation Procedures

REVENUE RULING 59-60 – VALUATION OF CLOSELY-HELD STOCKS

Internal Revenue Service Ruling 59-60 provides guidelines for the valuation of closely-held stocks. Revenue Ruling 59-60 states that all relevant factors should be taken into consideration, including the following:

1. The nature of the business and the history of the enterprise from its inception.
2. The economic outlook in general and the condition and outlook of the specific industry in particular.
3. The book value of the stock and financial condition of the business.
4. The earning capacity of the company.
5. The dividend paying capacity of the company.
6. Whether or not the enterprise has goodwill or other intangible value.
7. Sales of the stock and the size of the block of stock to be valued.
8. The market price of stocks of corporations engaged in the same or similar line of business having their stocks actively traded in a free and open market either on an exchange or over the counter.

Because determining the fair market value of a business enterprise is the question at issue, one must realize the conditions of this particular business. There is no set technique to the approach to be used that will be relevant to the various valuation issues that come up.

Frequently, an appraiser will observe wide differences of opinion as to the fair market value of a particular business enterprise or business interest. In answering such differences, one had better acknowledge that valuation isn´t an precise science. Revenue Ruling 59-60 states that “a sound valuation will be based on all relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.”

The fair market value of particular shares of stock in an non publicly traded corporation will vary because general economic conditions change. Doubt as to the stableness or continuity of the future income from the business enterprise decreases its value by increasing the risk of red ink in the future. The valuation of shares of stock of a company with unpredictable future prospects is a highly speculative operation. The judgement must be related to all of the elements impacting the value.

There is no single convention accepted for deciding the fair market value of a closely-held business, and therefore, the appraiser must look to all applicable factors in order to establish the fair market value of the business enterprise as of a given date.

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