In this insightful episode of Absolute Trust Talk, host Kirsten Howe welcomes Alex Spaete, a valuation expert and partner with Bridge Forensic CPAs. In part one of their discussion, Kirsten and Alex explore the complex world of asset valuation, particularly focusing on closely held businesses and real estate holding partnerships. Alex explains why valuing private entities requires specialized expertise beyond what’s needed for bank accounts or publicly traded securities. The discussion clarifies the critical distinction between owning a percentage of a business entity versus owning the underlying assets themselves. Alex details the two primary approaches to valuation—net asset value and income analysis—and how they apply to different types of business structures. Whether you’re planning your estate or simply curious about business valuations, this episode provides valuable foundational knowledge about how professionals determine what complex assets are truly worth.
Time-stamped Show Notes:
0:00 Introduction
3:14 To kick things off, we talk about why asset valuation matters in estate planning, particularly for complex assets.
4:35 Next, Alex explains his focus on closely held companies and non-publicly traded entities.
6:24 Now, we will dive into common valuation scenarios, particularly for privately held businesses and real estate holding partnerships.
8:02 Listen here for an explanation of real estate holding partnerships and how they differ from direct property ownership.
11:07 Learn about understanding net asset value as a critical starting point for business valuation methodologies.
12:54 Discover the important concept of discounting in valuations and why the sum of parts may not equal the whole value.
Get in touch with Alex!
Alex Spaete, Partner
Bridge Forensic CPA’s
(925) 203-5014
Transcript:
Hello and welcome to Absolute Trust Talk. I am Kirsten Howe. Today, I’m here with a guest in our video podcast at Absolute Trust Counsel, and we’re going to be talking about valuations. Let me explain that a little bit. In my business, we spend a lot of time focused on our clients’ assets. That’s the nature of what we do as estate planners and administrators. The two most important questions that we have about any given asset when we’re working with our clients is, number one, who owns it? Number two, what is it worth?
Our regular podcast audience knows that we frequently discuss ownership and titling issues. We consistently emphasize the importance of owning your assets in a trust and the consequences of failing to do so. Fortunately for you today, we won’t focus on ownership and titling. Instead, we’ll explore the more enjoyable and intriguing aspect, which is valuation.
And to help us with that conversation is my colleague, Alex Beatty. Alex is a valuation expert. He’s a partner with Bridge Forensic CPAs, LLP, here in Walnut Creek. Alex has extensive experience in business valuation, family law forensics, private industry experience in healthcare and physician compensation, and we’ll talk a little bit about some of those things. He is a CPA. He’s accredited in business valuation and a Certified Information Technology Professional, which is a nice bonus that his firm gets by having him working there. He’s not just a numbers guy; he can handle the IT.
Alex has qualified and testified and been appointed as a court’s expert in pretty much all of the courts in the San Francisco Bay Area and Sacramento area. He’s worked on thousands of litigation matters. He works primarily in the family law area, but we work with him in estate planning as well. He’s commonly asked to perform post-separation accountings, analysis of real property interests, and we’ll talk quite a bit about that, equity compensation, just all the kinds of property issues and income issues, all of that stuff that happens in a divorce. He also works in what we call business divorces because a lot of those same issues come up. Alex, welcome. I’m so happy to have you here.
Yes, thank you so much for having me. Pleasure to be here today.
You are welcome. And occasionally, I have a guest on whom I can’t believe I haven’t had this person before. We’ve been doing this podcast for so long, and what you do is such an essential part of what we do that I can’t believe this is the first time I’ve had you on the show. But anyway, better late than never.
Okay, so in the estate planning world, we need to know how much assets are worth in the planning, because sometimes the value will influence the plan itself. For example, if mom wants to leave her home to one child, but she wants all three kids to have an equal inheritance, we have to figure that out. You know, what is that home worth? Sometimes we need to know values for tax reasons, but almost always, after a death, we need to get values on all the assets.
And Alex, you know, some assets are very easy to value. I can value a bank account. My clients can value a bank account. You look at the statement, you can figure that out. Publicly traded securities, that information is known in the world. You can look it up on Yahoo Finance and figure out how much a stock was worth on a particular day. But Alex’s job is to value other kinds of assets that aren’t that regular, that lay people like us can’t possibly do, and we use him in the estate planning and administration world, but there are other contexts that you spend a lot of time working in. Alex, talk to us about some other aspects of your work, aside from the estate work.
Yeah, that’s a great point you raised. With the valuation work I do, it’s this third party, often closely held, not publicly traded type of company that doesn’t have a listed exchange or something like that, that you can easily price. So, I do valuations of closely held companies. In that capacity, whether it’s for a gift, an estate tax type purpose, as you mentioned, it could be an ownership transition that’s maybe not in a litigated or disputed matter, but as part of some good succession planning and they want to transition the company.
It often is done in the context of a dispute. The one area I don’t do valuation in is that of a business broker type of “I want to sell my restaurant” or “I want to sell my business.” That’s often an area where my valuation is done with the assumption that it will be used typically for some compliance or in a matter in front of a court. And there’s often a need to have a definite figure and value that can be put to a return, or something like that.
And so that is, I think, the focus of the types of company, or the type and purpose of why we’re valuing. Consequently, we see companies and businesses across all kinds of different industries that hold all different types of assets. So it’s just, I think, one of my favorite things about it is you get to look around at the built environment around you and realize that something, somewhere, something is someone’s job, and that there’s a business that’s probably been created to, you know, make the rag that you’re using to clean your car, or something like that.
We’re all about that. You get to see many things that exist in the world that we just don’t pay attention to or are unaware of. But you have to get your hands into those businesses and see what’s happening there in order to value them.
Okay, so let’s talk about the common scenario. Probably the most common thing we’ve worked together on is a privately held business. It’s not a publicly traded business, and it’s not like shares of Coca-Cola. These are business entities that are owned privately, and there’s no market for them. You can’t go to the NASDAQ and sell your shares.
And often we’re talking about a business entity, because it’s an official entity, like an LLC or corporation, but the business might just be that it owns rental property. It’s not a business like it’s got a bunch of employees, a factory, and all that kind of thing. That’s the most common situation that I get involved in. I know you get involved in all kinds of things, but to make it simple for our listeners, what are you looking at when you’re working with something like that? How do you figure out the value of that business?
It’s a great question. What I typically call those types of entities is “real estate holding partnerships,” and very often family real estate partnerships or something like that, because they’re often all the commensurate owners of that LLC, or the members of the family, or some sort of hierarchy, or family tree, some sort of relationship.
And there are really two major approaches and ways that we go about constructing the value of those entities. And before I kind of go into that, I think the critical distinction to understand, and where there’s more complexity to those types of valuations, is because often I get the question of, “Well, you know, okay, I own 20% of this LLC that owns a rental property that’s a warehouse, or whatever the type of property might be. What’s the difference between just getting the underlying real estate appraised? Why do I need you involved?”
And that really, the key thing is understanding that if you own 20%, let’s say, of a real estate holding partnership, you don’t own 20% of the underlying real property. You own 20% of the LLC that owns the real property, and the LLC might also own a bunch of other things. I’ve had very complicated valuations where you have one LLC that owns three other LLCs, one of them is an operating company, and you get this really nested, crazy combination, and that’s, you know, whatever the trust attorney set up. That’s the structure we have to operate under. But fundamentally, what’s being valued is this 20% or whatever holding percentage of the underlying company.
The two common approaches that we look at are as follows: Number one is net asset value. We’re looking at the underlying net asset value of this partnership. The primary focus is usually real estate, the cash that might be contained within the entity. I’m not a real estate appraiser. That’s one type of asset we don’t value. So, we typically work with a third-party real estate appraiser to value the underlying real estate, and then my valuation incorporates that real estate as part of what we do.
The other way of looking at it is often an income type approach, where you look at this rental property or multi-family apartment complex; it often generates income. It’s not usually something you’re just holding to hang on to just because you want it to appreciate; you also want it to generate income. And so that source of income can be a proximal source of value. We do have to work closely with the appraiser to ensure that that’s often an approach the appraiser is also looking at when valuing the property. We need to make sure we don’t double dip.
The underlying asset value would be maybe more of a starting point, like, we got to figure out what the real estate is worth, and there’s a bank account, an investment account, and maybe some computers. We don’t know what this particular entity actually owns as assets, and that may be a starting point.
And sometimes they own multiple pieces of real estate. So, the LLC might have six different pieces of property. And so very commonly, I see that it depends. I see the range of either one LLC or one property, which could be a really common structure, the estate planning structure that I see. And then sometimes they often see that maybe either by location or type of property, we see these LLCs that are like, “These are all my multi-family properties in this LLC. These are all my commercial properties in this LLC.” Or it’s by location: “These are all my Walnut Creek properties. These are all my Pleasant Hill properties.”
It can change the underlying holdings, but at the end of the day, our job is to totally identify what’s inside the LLC, and what does that underlying value come up with. And then really, the other big part of what we’re brought in for is substantiating, and often why we’re doing a valuation, is the substantiation of discounts to that book value to wrap that number inside your estate.
Okay, so let’s talk about—I have a concept, I have an idea of what you’re talking about with discounting, but just for our listeners, so you can come up with what you consider to be the value of the entire entity. And my client may own 10% of that entity, right? So, the entire value divided by 10, in one way of looking at it, that’s the answer. But there might be reasons why the total value divided by 10 isn’t the right answer, and that’s what you’re getting at when you use that term discounting. And I know you have some particular types of discounts that you apply in a situation. So go ahead and talk about what those are.
Certainly, and, you know, that’s a great point. That’s also why we get involved. Because there is that idea that you could just take the pro rata value—if the partnership is worth a million dollars, and I own 10% of it, I have a $100,000 interest in this. That very simple approach can be used, especially if there’s no concern about the estate going over the threshold. But when there is a concern about that, the discount idea is really to look at this idea. There are two primary components of these discounts that we’re evaluating.
The first is control. And it’s very common in valuation world that the sum of the parts don’t necessarily equal the whole—that I’ve commonly done valuations where I’ve had a 10%, 20% interest, and then a 30% interest, and we valued all of them. And when you add them all up, they don’t add up to 100%.
But the two key components of where we’re coming up with these discounts and why they’re substantiated really come under two main tenets. The first is that of control. If I own a 10% stake in a real estate holding partnership, I don’t have—remember, I don’t have 10% of even the property. Depending on the operating agreement, I have 10% of this company that might have very little ability to do anything with. That impacts how easily you’d be able to sell or transact the interest and also has a lot of potential limitations on how much you might even receive from the interest, if it does create a distribution or something like that.
So, control is a big thing that we evaluate. We look at a lot of the operating agreements and who some of the other members of the LLC might be. The other big discount is liquidity. The baseline for most liquid assets in the valuation world is a stock you can sell and get cash in T minus two days. That’s usually not the case with these real estate holding partnerships. They take a little longer to sell. Liquating a 20% interest in a real estate holding partnership can take months or years.
Often, the agreement might be so specific that it restricts how quickly you can sell and who you can sell to. There can be a lot of timing issues with getting your money out of the pro-rated value. And so, to account for that factor, there’s also some discounts related to either what’s called marketability or liquidity.
If what you own is, in theory, worth $100,000 but you can only sell it to these three other people and it’s all spelled out, and it’s like a seven-month process, it’s not worth $100,000. It has—you’ve got to get a discount on all those issues.
And that’s precisely what we look at.
Well, thank you so much, Alex. I really learned a lot talking to you, and I’m sure my audience did as well. My guest today has been Alex Beatty with Bridge Forensic CPAs, LLP. I hope you all learned a lot, and I hope you’ll join us next time, and I look forward to connecting with you then.
Thanks so much for having me.
Resources Related to This Episode:
- Absolute Trust Talk Episode 173: Stop Family Feuds: Expert Tips for Probate Real Estate Sales
- Absolute Trust Talk Episode 156: Probate Alternatives: Real Estate Affidavits and Succession Petitions Explained
- Absolute Trust Talk Episode 141: Managing Real Estate Assets as a Trustee
- Absolute Trust Talk Episode 138: Beyond Profits: Tackling Key Issues for Business Longevity
- Absolute Trust Talk Episode 137: Maximize Your Wealth: Expert Financial Strategies for Business Owners
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your unique needs to build a secure future now effortlessly. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
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