Business Valuation Key Man Discount

When valuing closely held companies for marital dissolu.

Business valuation key man discount. The definition of a key person discount is an. An important consideration called a key man discount was presented at court in relation to the date of value to pinpoint the fair value for the business. The key for successfully utilizing discounts and or premiums is to truly understand the ownership characteristics and attributes of the subject equity interest and the third party supporting base data.

Having a key person as a large revenue generator would likely materially affect the financial position of the business. According to the international glossary of business valuation terms a key man discount is. Under estimate the discount rates.

The analysis above provided me with the foundation to discount the value of the lobbying business based on the importance of the key person owner. Quantifying the discount is a challenge because unlike marketability and minority discounts there s little empirical support for across the board key person discounts in business valuations. An amount or percentage deducted from the value of an ownership interest to reflect the reduction in.

Instead of taking a separate discrete discount at the entity level some experts incorporate a key person discount into their valuation methodology. An amount or percentage deducted from the value of an ownership interest to reflect the. Mary ann lerch 1992 discount for key man loss.

This key person may be a revenue generator possess technical. Practice pointers revenue ruling 59 60 sets forth the premise that valuation of closely held business interests is. Consequently the buyer of the business will have to factor in an illiquidity discount to estimate the value of the business.

A key person or thin management discount would be appropriate in the valuation of a closely held company to the extent that an owner or employee who would be difficult to replace is responsible for a significant or material portion of the business such as sales or profits. Although the approach for implementing the discount and subjectively assess its magnitude had to be determined an objective basis for the existence of the discount had been established. For example under the income approach a valuation expert might adjust the discount rate capitalization rate or projected cash flows to reflect key person risks.