Employee Stock Ownership Plans in Business Succession Planning

Small business succession planning is a major challenge and opportunity for community economic development. There are significant and some negative tax consequences following the death of an owner without a succession plan. The sale of existing businesses, even if successful, could result in relocation of the business, dissolution by competitors, or collapse under absentee owners. The lack of succession planning for small businesses is also a reflection of the lack of resources available for planning and a lack of attention to succession details which are typically delayed while dealing with the pressing matters of ongoing business at hand.

Through the use of a leveraged ESOP, a bank will lend funds to the ESOP which is guaranteed by the assets of the company. The ESOP uses the money to purchase shares from the company. The owner then transfers stock to the ESOP and the firm makes ESOP contributions monthly equal to the loan payments. A trustee is appointed to protect the interests of the employees while ensuring the firm is purchased at a reasonable amount. Prior to establishing an ESOP, the owner should enlist the services of a business valuation analyst to ensure a valid amount for the business.

The ESOP offers a means to heighten proper control of the firm, as well as transferring ownership. In an ESOP the workers voting rights for stock are passed through by the trustee to the workers who will instruct the trustee how to vote the shares that they hold before they have full control of the firm. The construction of ESOPs is dependent upon the willingness of both the workers and the owners to pursue such a path. Cooperation cannot be imposed upon either.

The various professional service providers would find it in their interest to educate small business owners about ESOPs. The ESOP would become one of the financial products employed by bankers, lawyers, accountants with their small business clients. Not only does the ESOP provide a way for these professionals to market services, ESOPs keep the firm as a long term client for the benefit of the provider as well as for the community.

Equipment Appraisals in Estate Planning

What do equipment appraisers have to do with estate planning? That’s a good question and one with multiple answers. The fact is, some of the largest equipment appraisal assignments are typically estate and or gift appraisals and much of an equipment appraisal practice can be involved with estate planning in one form or another.

The IRS has a lot to do with that. Whenever a taxable estate* includes equipment, an equipment appraisal will be needed. The IRS recently clarified the phrase qualified appraisal” as meaning a USPAP-compliant appraisal; this, in combination with the recent IRS crack-down on abusive estate appraisals, has emphasized the need for estates to use accredited appraisers. The days of values dependent on a “one-sheet wonder” from an equipment dealer or auctioneer are over.

Two of the most important estate planning issues a machinery and equipment appraiser can address during estate valuations are absorption and installation costs.


Many estates have a large number of similar types of equipment. When is it appropriate to use absorption (AKA blockage) for appraisals that will be used for estate planning?

Example: An appraisal for a law firm acting on behalf of a large family farming operation for gift tax purposes. The equipment to be valued included nearly 100 tractors. It was important to consider what the effect on value of an individual tractor on the market would be if it were released for sale along with 100 very similar tractors. By doing so, the equipment appraisal saved the taxpayer a significant amount of gift tax by using blockage in an appropriate and properly documented manner.

Installation Costs

When estates include a large amount of installed machinery, it’s important to determine when it’s appropriate to include shipping, installation and permitting costs in the related appraisal, keeping in mind that these associated costs often provide more than half of the value for installed machinery.

Example: Valuation with a Business Valuation appraiser on an estate including a recently upgraded factory. In this scenario, the appraisal is generally for Fair Market Value in Continued Use, which assumes that the earnings support the values. In this case, however, the upgrade included a significant design flaw – resulting in an annual net operating loss – so that the earnings of the factory did not support the values. Instead of using the typical definition of value, the equipment appraiser provided research and the proper documentation to justify and support the appropriate definition of value.

These two examples are obviously just a small sample of the specific estate valuation issues that equipment appraisers routinely encounter.Two prevalent concerns these days include the economic obsolescence factors of CARB diesel emissions regulations and the economically influenced dilemma of under-utilized processing facilities. And of course, there are many other issues involved in equipment appraisals for estates that are not directly linked to current conditions.

Surprising enough, then, it turns out that an equipment and machinery appraiser – while perhaps not as regularly involved in estate planning as some attorneys and financial planners – can be actively involved in estate planning. And we can often contribute a unique perspective to the estate planning community.

*The exact dollar amount that defines a taxable estate can vary from year to year. Be sure to contact your tax expert for up-to-date regulations.

How to Value a Gas Station For Sale

In most cases, the process of undertaking a gas station valuation can be a complicated endeavour. Far removed from the usual question of how you progress through the steps of the valuation itself, there are still quite a variety of variables to keep track of, including principally whether the property in question is leased or owned and whether it’s owned as part of a franchise agreement with a large oil company. First and foremost, always remember to apply a detailed process of due diligence and extend considerable attention to the financials when you’re working toward arriving at a top-notch value proposition.

As a buyer, you must be prepared to make certain assumptions and decisions yourself and not to rely on the often partial information supplied by the seller. It is up to you to determine the value of the business for you personally, as the amount the business owner thinks the gas station is worth has little if anything to do with its actual value.

Traditionally there are two different ways to look at gas station convenience store valuation, and these are either asset-based, where the income-producing assets are individually valued and totaled to make the purchase price, or cash flow based, which is the most popular. In this scenario, the overall profit is adjusted according to certain expenses, multiplied and used to establish a price. The multiple is essentially the premium placed on the business and can be anything from one, up to five times this figure.

Before you can arrive at a value that you are happy with, you need to have certain fundamental questions answered. If the business occupies rented property you must engage with the landlord. Many landlords are not interested in issuing a new lease unless they can be sure that the incoming person has experience running this particular type of business. However, they are almost always willing to negotiate as they do not want to see the property sitting around empty!

As an owner of a gas station and convenience store you will have many different suppliers and vendors, some of which are absolutely critical to the ongoing success of the business. Never assume anything and make sure that you can enjoy an ongoing good relationship and great trading terms with these entities.

When considering cash sales, if the seller can’t prove part of the sales they’re talking about, then you can’t include it as part of your value assessment. Often, gas station owners will speak with pride about the incredible volume of cash sales, and tell you about it almost as if it’s something magical. Don’t forget that they’ve been benefiting from avoiding paying taxes on this part of their income, can almost never actually prove that it exists and therefore can’t really expect to make a profit from it through selling their business.

Most often you will want to consider using the total owner benefit as a base to create a valuation for the business. This is defined as the net income of the business added to the owner salary, any perks, depreciation and interest less any amount that you might have to put aside for capital projects assessed. With regard to average business valuation, gas station or convenience stores that are full service will often command 2 to 3 times whatever the owner benefit figure it is. If it is a smaller establishment and self service, 1 to 2 times. Consider the volume of trade versus the amount of hours that you will have to put in. A 24-hour, seven-day a week establishment takes a lot of management and oversight.

While business financials and owner benefit multiples are primary to your decision-making process, remember to consider a host of other variables:

– During the process of observation, use a period when you actually count the number of patrons coming in and out of the station to enable you to come up with a good average for traffic.

– Remember that you should aim for between 25 and 33% return on your cash investment when purchasing a business such as this, although if you are going to be an absentee owner you should be prepared to accept a lower return.

– Watch out if the owner appears to be working excessive hours or is reliant on a number of his family members to help him staff the operation. Pay attention to employee records and costs and ask yourself whether you are prepared to be as hands-on as he appears to be.

– Consult with local authorities to see if there are any major road construction projects planned. Sometimes these are inevitable but can have major disruptive forces.

To really focus the attention of the seller as you establish a value for your business purchase, why not ask him or her to engage in an “earn-out” scenario, where a portion of the sale price is returned to them over a period of time subject to certain conditions. This will ensure that you have their full attention during the disclosure phase!