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How do I estimate the value of the family-owned business?

A previous post on this blog discussed the important duty the executor of an estate has to value the property of the estate accurately, particularly when the person who died had a lot of wealth and may be subject to federal taxes as a result.

One of the ways Houston, Texas, residents build their wealth is through a family-owned business, and a Houston resident may die with a lot of money tied up in the value of business he or she worked hard at for many years.

The problem with family-owned businesses is that they are rarely or ever publically traded, meaning the value of the stock or shares in the business cannot be determining just by looking up the sale price on a given day. In many cases, there really is no history by which someone can judge the value of a family business.

Therefore, many times, part of estate administration will mean hiring an accountant or financial expert to determine the value of a family business so as to figure out what to do with it after the death of a key owner and also how to distribute the property of the estate. Nevertheless, an executor can get a rough estimate of family business's sale price using some appropriate guiding methods.

One such method takes account of the "seller's discretionary earnings," or SDE. To calculate SDE, one starts with the reported profit for the business. One also adds back in to that profit any salary the business owner took as an employee of the business, as well as certain other items like charitable donations and things that, while deductions on tax returns, are not true business expenses.

Usually, businesses will sell at one to three times the SDE, although the exact multiplier is determined by a lot of different and variable factors. Once a factor is estimated and applied, one adds all business assets and subtracts all debts and other liabilities.

Again, this method is only an estimate, and in estate cases, it may be best to consult with an experienced Houston estate administration attorney.

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