A 20% business interest is not necessarily the same thing as 20% of the business. That sounds obvious.
But when a closely held business interest is transferred to a trust, it can be easy to focus on the percentage and overlook the rights that come with it. A recent estate-planning seminar got me thinking about this from a valuation perspective. The discussion focused on how modern trust structures can separate control, investment authority, distribution decisions, information rights, and fiduciary responsibility.
For a business valuation professional, that raises a practical question:
“When someone transfers 20% of a business, what exactly did they transfer?”
The percentage is only the starting point. Consider an owner transferring a 20% LLC interest as part of an estate plan. “20%” tells us the ownership percentage. It does not necessarily tell us:
- Who controls the company?
- What rights does the holder have to distributions?
- Can the interest be transferred?
- Are there rights of first refusal or redemption provisions?
- What information is the holder entitled to receive?
- What happens upon the owner’s death?
- What other provisions affect the holder’s ability to realize value?
Those details can affect the economics of the interest being valued.
Where the attorney’s documents meet the valuation
For estate and gift tax purposes, the valuation professional is not simply valuing “20% of the company.”
The assignment is to value the specific ownership interest being transferred, as of the relevant valuation date and under the applicable standard of value.
That makes the governing documents an important part of the valuation analysis, not merely supporting paperwork to be reviewed after the financial analysis is complete.
This is also why a restriction does not automatically translate into a valuation discount.
The better sequence is:
Identify the rights → understand the restrictions → determine their economic effect → reflect that effect in the valuation, if appropriate.
A practical example
Suppose two companies each have an owner transferring a 20% interest. The financial performance of the companies is identical.
But in Company A, the 20% interest has meaningful voting rights, fewer transfer restrictions, and greater access to distributions. In Company B, the interest is subject to significant transfer restrictions, limited control, and different distribution provisions.
Should the two interests have the same value?
Not necessarily.
The underlying company may be similar, but the property interests being transferred are not identical. That is the point that can get lost when the analysis starts with a percentage rather than the rights attached to that percentage.
What I would want to see before starting the valuation
For a closely held business interest being transferred as part of an estate plan, I would want the relevant:
- Entity documents – operating agreement, partnership agreement, shareholder agreement and amendments.
- Transfer provisions – buy-sell provisions, rights of first refusal, redemption provisions and other transfer restrictions.
- Ownership information – current capitalization and the interests held by other owners.
- Control and distribution provisions – voting rights, management rights and provisions affecting distributions.
- Relevant trust documents – where the trust structure affects the nature of the property interest being transferred.
The valuation takeaway
The interesting question isn’t:
“What is 20% of this company worth?”
It is:
“What would a hypothetical buyer pay for this particular 20% interest, with these particular rights and restrictions, as of the valuation date?”
That is a much more precise valuation question. And it is why the operating agreement can sometimes be just as important to the valuation analysis as the income statement.
For attorneys and estate-planning advisors, providing the governing documents at the beginning of the valuation assignment can help ensure that the interest being valued is properly understood from the outset.
Because sometimes the most important thing about a 20% interest isn’t the 20%. It’s everything that comes with it.
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