Planning for Closely Held Business Owners - 9 Types of Discounts and Premiums

Question 1

Describe different types of discounts and premiums.

Question 2

Explain the ordering for applying discounts in the business valuation
process.

Question 3

When discounts or premiums may apply to a business valuation

Question 4

The value of a certain number of shares of outstanding stock of a closely held corporation may be equal to t

Answer 4

Their proportionate part of the value of the corporation.

Question 5

when the corporation whose stock is being valued is a holding company, rather than an operating company

Answer 5

The value of a certain number of shares of outstanding stock of a closely held corporation may be equal to their proportionate part of the value of the corporation.

Question 6

Business valuation discounts have been allowed in the following circumstances:

Answer 6

• The stock being valued represents a minority interest in the closely held corporation (
• The stock is subject to buy-sell restrictions
• The stock is not registered for public sale;
• Sale of the stock is subject to SEC restrictions
  lack of marketability of the stock (
• a large block of stock being valued
• expenses of liquidating the corporation
• lack of diversification in an operating corporation’s business (
• lack of diversification in an investment corporation’s stock portfolio
• loss of a key management person (see VALUE: 9,054.20); recurring investment losses;
• incremental management costs due to the nonhomogeneous nature of the corporation’s assets
• built-in capital gains
• corporate business problems
• lack of voting rights

Question 7

No discount in stock value is allowed to reflect built-in capital gains tax liability on an installment obligation when the likelihood of payment of the tax is

Answer 7

speculative.

Question 8

In determining the value of a block of stock in a closely held corporation, consideration should be given to the degree of control of the corporation represented by the block of stock being valued. A discount to the value of a block of stock that represents only a _________________might be appropriate, while a premium might be added to the value of a block of stock which permits the owner to ______________________.

Answer 8

In determining the value of a block of stock in a closely held corporation, consideration should be given to the degree of control of the corporation represented by the block of stock being valued. A discount to the value of a block of stock that represents only a minority interest might be appropriate, while a premium might be added to the value of a block of stock which permits the owner to control the corporation.

Question 9

a controlling shareholder may have all or some of the following powers:

Answer 9

• the right to elect the entire corporate board of directors; * the right to remove directors; * the right to appoint and remove corporate officers; * control over the amount and timing of the payment of dividends; 8 and * ability to compel liquidation of corporate assets.

Question 10

What is a control premium?

Answer 10

A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company.[1]