Central Pacific Valuation

06/11/2026

Not All Interests Are Created Equal: The Case for Minority Discounts in Estate and Gift Planning

A business owner with a $10 million company doesn’t necessarily have a $4 million estate planning value if they’re transferring a 40 percent interest. Once valuation discounts are properly applied, the taxable value of that interest can be meaningfully and defensibly lower. That gap between proportional value and fair market value is one of the reasons minority interest transfers remain such an important estate and gift planning tool.

Why a Minority Interest Is Worth Less
Imagine owning 20 percent of a private company. You can’t force a distribution. You can’t replace management. You can’t sell the company or easily compel a buyout of your interest. If the majority owner decides to reinvest earnings rather than distribute them, you wait. If she sets her own compensation at a level that reduces profitability, you absorb it. Most buyers would pay less for that interest than for a controlling stake, and that’s the economic reality that valuation discounts are designed to reflect.

There are two distinct adjustments involved. The discount for lack of control (DLOC) captures the absence of those decision-making rights. The discount for lack of marketability (DLOM) reflects the illiquidity of the interest itself. There’s no ready market for a fractional stake in a private company, and finding a willing buyer takes time and cost.

Although these concepts are often considered to be lumped together as a “minority discount,” they measure different economic limitations, and we analyze them separately.

Operating Companies: Control Lives in the Cash Flows
For minority (aka noncontrolling) interests in operating companies, we typically don’t apply a separate DLOC. Instead, we build the control adjustment into the income approach itself.

Consider a founder-operated manufacturing business in which a 20 percent shareholder may have no ability to influence compensation, the timing of capital expenditures, or dividend policy. Those limitations are real, but they’re reflected in cash flow projections based on what a minority holder would actually receive, not what a controlling owner could extract. The result of this approach is a minority, marketable value, to which only a DLOM is then applied.

Applying a separate DLOC on top of cash flows already built on a minority basis risks double-counting the same adjustment, which can draw IRS scrutiny.

Property-Holding Entities: A Different Starting Point
The analysis works differently for real estate LLCs, family limited partnerships, and investment holding companies.

Consider a family LLC that owns an apartment building. A 25 percent member cannot force a sale, refinance the property, or control distributions. If a controlling member decides not to sell for ten years, the minority owner may have to wait. Those limitations are significant, and they affect value.

Because these entities are often valued using net asset value (based on the appraised value of the real estate and/or other investments), which represents a control-level indication of value, a discrete DLOC is typically applied before applying a DLOM.

In these situations, the governing documents, particularly provisions relating to management rights, distributions, and transfer restrictions, become critical to the analysis.

What the IRS Is Watching
Valuation discounts remain a frequent area of IRS scrutiny.

For operating companies, examiners often focus on whether the valuation already reflects minority-level economics. For holding companies, they examine whether the discounts are supported by the governing documents and empirical market evidence.

A parent transferring a 30 percent interest in a family LLC isn’t transferring 30 percent of control. The valuation should reflect that economic reality.

The Bottom Line
A minority interest is worth less than a proportional slice of the whole company, and that’s exactly why valuation matters in estate and gift planning. For business owners considering gifts, estate planning transfers, or succession strategies, how that interest will be valued deserves as much attention as the structure of the transfer itself.

Key Takeaways for Advisors
• A minority interest is often worth less than its proportional share of the overall business.
• DLOC and DLOM measure different economic limitations and are analyzed separately.
• For property-holding entities, a discrete DLOC is appropriate because net asset value is a control-level starting point.
• For property-holding entities, a discrete DLOC is frequently appropriate because net asset value represents a control-level indication of value.
• The governing documents drive discount magnitude — transfer restrictions, distribution rights, and management provisions are where the analysis begins.
• A well-supported appraisal remains essential when discounts are expected to withstand IRS scrutiny.

Minority interest discounts are technically defensible when they’re analytically grounded — and that’s where credentials matter. At Central Pacific Valuation, Shannon Lowther (CFA, ASA, ABV) and our team bring the professional rigor these engagements require. Our appraisals are USPAP-compliant, prepared by credentialed appraisers, and built to hold up under IRS scrutiny.

If you’re advising a client on a gift, estate transfer, or succession involving a minority interest, we’d welcome the conversation. Contact us to discuss your engagement.

03/07/2026

Parting Company: When Your Buy-Sell Agreement Fails

Buy-sell agreements are often signed and forgotten—until a death, retirement, or ownership dispute puts the valuation language to the test. At that point, the appraisal provision becomes one of the most important economic terms in the entire document. Unfortunately, many agreements contain ambiguity that leads to delays, unexpected value conclusions, or litigation. A periodic review of these provisions, especially after significant business or ownership changes, can prevent costly surprises.
Fair Value Is Not Fair Market Value

The most common problem is the failure to clearly define the standard of value. “Fair value” and “fair market value” are not interchangeable, and the difference can be significant. Fair market value generally assumes a hypothetical willing buyer and seller and often incorporates discounts. Fair value in shareholder disputes may exclude them. If the agreement uses shorthand without a definition, the parties may end up litigating terminology before they ever reach the valuation. Clarity up front can prevent that.
Outdated Formula Pricing

Fixed-price provisions, often based on last year’s book value or a multiple of earnings, can work when a company is young and simple. The problem is that formulas are rarely revisited, and businesses rarely stay simple. As a company adds real estate, changes its capital structure, or grows substantially, the formula drifts further from economic reality with every passing year.

When a triggering event finally arrives, the price the formula produces can shock one or both parties. One of our engagements involved an exiting minority shareholder, a book-value formula, and no appraisal process. We delivered our valuation. Five years later, the matter is still unresolved. Some agreements don’t just fail at the triggering event—they keep failing long after it.

Getting a periodic, independent valuation—obtained while the business relationship is intact and stakes are low—gives owners a realistic price anchor and a shared frame of reference before emotions and financial pressure enter the room.
Unclear Appraisal Mechanics

Even when an agreement calls for an appraisal, the process is often underdeveloped. Key questions should be addressed in advance: the standard and level of value, the valuation date, whether discounts apply to non-controlling interests (an often overlooked provision), and who engages the valuation firm. Without that guidance, key provisions are left open to interpretation, and the conclusion becomes vulnerable to challenge. A well-drafted provision keeps the focus on valuation, not contract interpretation.
Multi-Entity Structures and Non-Operating Assets

Many closely held businesses now operate through multiple entities, with real estate or excess cash held outside the operating company. This structure is especially common in Central California agricultural operations. Older agreements often do not specify whether those assets are included in the buyout price or how related-party arrangements are treated. If the agreement is silent, the result may not reflect the owners’ original intent, particularly where estate planning has introduced non-controlling interests across entities.
Dispute-Resolution Framework

Finally, the agreement should define a practical way to resolve differences. Many agreements we’ve seen address it through a structured three-appraiser process. While that’s an effective mechanism, the time, cost, and effort involved can be substantial. In the last three-appraiser process we participated in, the process took several months, involved both real estate and business appraisers, and required significant coordination between the parties’ respective counsel and the appraisers. Alternatively, a single jointly retained appraiser or another binding mechanism can significantly streamline the process and mitigate relationship strain when a triggering event occurs.
A Proactive Opportunity

Buy-sell agreements should not be static documents. Reviewing the valuation provisions after major business, ownership, or structural changes can help ensure the agreement yields a defensible result when needed most.

• Define the standard of value explicitly
• Update or replace formula pricing
• Obtain periodic independent valuations
• Specify the valuation date, level of value, and discount treatment
• Address multi-entity structures and non-operating assets
• Include a clear dispute-resolution mechanism
• Revisit the agreement after significant changes in the business

02/16/2026

The Essential Role of Valuation in Estate Planning

Introduction
Estate planning is most effective when it begins before a life event, liquidity event, or legislative change forces action. In my work with business owners and families, I’ve seen time and again how early valuations provide clarity and open the door to thoughtful planning. I’ve also seen the dark side – sadly, too often – when a lack of planning results in a business and family thrown into turmoil stemming from an unanticipated life event. I recently reviewed the Goldman Sachs 2025 Year-End Planning Opportunities report, and one of the strongest messages echoed what I see every day: families benefit profoundly from understanding the true value of what they own.

Valuation Creates a Baseline for All Planning Decisions
Before establishing trusts, making gifts, or updating an estate plan, families should understand the starting point: the current value of their assets. This is especially true for privately held businesses, real estate portfolios, illiquid investments, and entities with complex ownership structures.

As an example, we’ve recently worked with several family business owners who were considered making major gifts to their beneficiaries. Once we completed their business valuations, it became clear the businesses’ values were considerably different than expected—opening the door to planning opportunities that had not even been considered. Many owners assume they know roughly what their business is worth, but informal estimates can be off by millions.

Armed with this information, families and advisors can:

• Determine gift amounts that are sustainable and prudent
• Identify opportunities to transfer appreciating assets sooner
• Anticipate liquidity needs for future generations
• Balance wealth among children or beneficiaries

Without guidance regarding asset values, planning becomes guesswork.

The Importance of Estate Planning
The Importance of Estate Planning
Valuation Supports Conversations Among Advisors
Estate planning involves a team: attorneys, CPAs, wealth advisors, and sometimes business valuation experts and real estate appraisers. When all professionals share a common valuation baseline, they can collaborate more effectively, reduce inconsistencies, and streamline the planning process. As valuation professionals, we work alongside estate attorneys and CPAs to ensure families have accurate, objective data before making long-term decisions.

This coordinated approach helps:

• Identify the best assets for gifting or trust funding
• Structure ownership to protect long-term value
• Avoid unintended consequences in financial or legal structures

Valuation ensures all advisors are speaking the same language.

Conclusion
The most resilient estate plans are those built on accurate information and clear financial insight. Professional valuation provides the foundation families need to make informed decisions, transfer wealth strategically, and preserve their legacies with confidence. In a world where financial landscapes and family dynamics evolve, business valuation remains a timeless, essential tool for thoughtful estate planning. Don’t wait for a life event to force the conversation—consider whether your current plan still reflects the true value of your holdings and your long-term intentions.

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