What Is a Business Valuation
A business valuation is a professional opinion of the fair market value of a business interest. The IRS defines fair market value as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.
For estate planning purposes, “the business” is almost always a minority interest in a closely held company — an LLC membership interest, S-Corp shares, or C-Corp stock that is not publicly traded. These interests are difficult to value because there is no public market, no daily trading price, and no comparable transaction that maps directly onto your business. The appraiser must build the value from the ground up using financial statements, industry data, and one or more of the three recognized valuation methods.
A business valuation for estate planning is not the same as a sale-price estimate. A broker who tells you your business is worth $3 million is estimating what a motivated buyer might pay in the current market. A qualified business appraiser producing a defensible estate tax valuation is calculating the IRS-standard fair market value of a specific percentage interest, which may be significantly different — often lower, once valuation discounts are applied. See Business Succession Planning in Georgia for how valuation fits into a complete succession plan.
The Three Business Valuation Methods
The IRS published the foundational guidance on valuing closely held businesses in Revenue Ruling 59-60. That ruling identifies the factors appraisers must consider and describes the three approaches every qualified appraiser uses.
Income approach. Values the business based on its ability to generate future income. The two main methods are capitalization of earnings (dividing a single year’s normalized earnings by a capitalization rate) and discounted cash flow (projecting future cash flows and discounting them to present value). The income approach is most appropriate for businesses with stable, predictable earnings. It produces the widest range of outcomes depending on which earnings figure and discount rate the appraiser selects.
Market approach. Values the business by comparing it to similar businesses that have been sold or to publicly traded companies in the same industry. The guideline transaction method uses actual sale prices of comparable private companies. The guideline public company method uses trading multiples from similar public companies, then applies a private company discount. The market approach is most reliable when there are recent, comparable transactions in the same industry and geography.
Asset approach. Values the business based on the fair market value of its assets minus its liabilities. This method is most appropriate for holding companies, real estate entities, and businesses where the primary value is in the balance sheet rather than in ongoing earnings. It is rarely appropriate for an operating business because it ignores the value of the customer relationships, brand, and workforce that make the business worth more than its tangible assets.
Why Business Valuation Matters for Estate Tax in Georgia
The federal estate tax applies to estates above the exemption — $13,990,000 per person in 2025. Above that threshold, the tax rate is 40%. A business interest is included in the estate at its fair market value on the date of death. For a Georgia business owner with a company worth $5 million and personal assets worth $10 million, the total estate is $15 million — above the exemption, and the $1 million overage is taxed at 40%.
The estate tax return (IRS Form 706) requires a qualified appraisal of any closely held business interest. The IRS scrutinizes business valuations carefully. An appraisal that does not meet the IRS’s qualified appraisal requirements — performed by a qualified appraiser, using recognized methods, within the required timeframe — can be disregarded, and the IRS will substitute its own value. That substituted value is almost always higher than the original appraisal.
The Connelly ruling added a new wrinkle for C-Corp owners. If the company holds life insurance on the owner’s life and is a party to an entity-redemption buy-sell agreement, the insurance proceeds increase the company’s FMV for estate tax purposes. The redemption obligation does not offset that increase. This means the estate includes the full value of the insured company — including the insurance proceeds — even though those proceeds were intended to fund the buyout. See What Happens to a Georgia C-Corp When the Owner Dies for the full Connelly analysis.
Why Business Valuation Matters for Buy-Sell Agreements
A buy-sell agreement is only as good as the valuation method it uses to set the purchase price. There are three common approaches in buy-sell agreements: fixed price (the owners agree on a dollar amount), formula (a multiple of revenue or EBITDA), and independent appraisal (a qualified appraiser determines FMV at the triggering event).
Fixed-price agreements become stale. An agreement drafted five years ago at a $2 million fixed price may be funding a $6 million business today. The surviving owners get a bargain; the deceased owner’s estate gets shortchanged. The IRS also requires that buy-sell prices must reflect genuine FMV or the IRS will disregard the agreement and substitute its own valuation under IRC § 2703 — a rule that applies when the price fails the bona fide business arrangement test.
Formula agreements can produce distorted results. A multiple-of-EBITDA formula sounds objective, but EBITDA fluctuates with one-time events, owner compensation adjustments, and timing of capital expenditures. A formula that was calibrated for a stable business may significantly overvalue or undervalue the company at a moment of transition.
The most defensible approach is a buy-sell agreement that requires an independent appraisal by a qualified appraiser at the triggering event, with a defined process for resolving disputes between competing appraisals. This produces a price that reflects the actual value of the business at the moment of transfer — and one the IRS cannot easily challenge.
Valuation Discounts — Minority Interest and Lack of Marketability
When a business owner transfers a partial interest in a closely held company — through a gift, a sale, or at death — the transferred interest is worth less than a proportional share of the whole company’s value. Two discounts capture this reduction:
Minority interest discount. A minority owner cannot force a sale, cannot compel distributions, and cannot control management decisions. A buyer of a 30% interest in a closely held LLC is buying 30% of the economics with no control — a less valuable position than a controlling interest. Minority discounts typically range from 15% to 35% depending on the degree of minority and the specific rights granted by the operating agreement.
Lack of marketability discount. A closely held business interest cannot be sold on a public exchange. Finding a buyer takes time, effort, and transaction cost. This illiquidity reduces value. Lack of marketability discounts typically range from 20% to 40% depending on the company’s size, profitability, and dividend history.
Combined, these discounts can reduce the taxable value of a transferred business interest by 30 to 50 percent. For a business owner in a taxable estate, this is one of the most powerful legal tools for reducing estate tax. It requires a qualified appraisal — not an estimate — to support the discount in front of the IRS. See Best Estate Planning for Business Owners in Georgia for how these strategies fit into a complete plan.
How to Get a Business Valuation in Georgia
1
Identify the purpose of the valuation before hiring an appraiser
The purpose determines the standard of value, the valuation date, and the level of documentation required. Estate tax valuations use the IRS fair market value standard and require a qualified appraisal under IRS regulations. Buy-sell agreement valuations may use a different standard if the agreement defines it. Gift tax valuations require an appraisal within 60 days of the transfer. State the purpose to the appraiser before any engagement begins.
2
Hire a credentialed business appraiser
A qualified appraiser for IRS purposes must hold one of three recognized credentials: Certified Valuation Analyst (CVA, from NACVA), Accredited in Business Valuation (ABV, from AICPA), or Accredited Senior Appraiser (ASA in Business Valuation, from ASA). An accountant who “values businesses” as a side service without one of these credentials does not meet the IRS qualified appraiser standard. An unqualified appraisal can be disregarded by the IRS, leaving the estate without a defensible position.
3
Gather three to five years of financial statements and tax returns
The appraiser will need complete financial statements — balance sheets and income statements — for three to five years, plus the most recent tax returns. They will also need the operating agreement or shareholders agreement, a list of significant assets, any existing buy-sell agreements, and information about key customers, key employees, and industry conditions. Incomplete financial records produce incomplete appraisals.
4
Update the valuation every three to five years — or after major events
A valuation done five years ago is not a current valuation. Update it after any major event: a significant revenue change, a new owner joining or leaving, a large asset purchase, a key customer loss, or a change in the business model. For estate planning purposes, the valuation should be current enough to defend in front of the IRS. “We had an appraisal in 2019” is not a defense if the business tripled in value since then.
5
Coordinate the valuation with your estate plan and buy-sell agreement
The valuation is not a standalone document — it should feed directly into your buy-sell agreement price or formula, your gifting strategy, and your estate tax projection. Your estate planning attorney and CPA should review the appraisal before it is finalized to confirm it supports the specific estate planning moves you are making. The cost of a complete business owner estate plan typically includes coordination between the attorney, CPA, and appraiser.
