Why 2025 Is Turning Out to Be a Great Year

In January, we wondered what the year would bring. Well, now we know what the first half of the year has brought, and it is good news for high-net-worth business owners.

On Wall Street, the saying is buy low, sell high. In the world of estate planning, the saying is more like sell high, transfer low. The commonality between those two thoughts is timing, and timing is everything. And the timing is not only right, but perfect for business owners who have estate planning or succession planning matters to tend to this year.

In our November 2024 newsletter, we wrote about how the sharp rise in interest rates during the period of high inflation between 2021 and 2023 had put pressure on the values of businesses and reduced them by roughly 20 percent comparing pre-pandemic and post pandemic values. This is the opposite of what happened when rates quickly declined shortly after September 11, 2001. Then, the decline in interest rates drove market investment rates down along with a decline in real estate and business cap rates which in turn drove real estate and business values up.

Next comes 2025, with a new administration taking office. Measures taken since January 20 have had significant ramifications for the long-term expected future cash flow of businesses and created a sharp rise in risk due to uncertainty related to tariffs and their impact. The market’s reaction can be seen in the volatility of the major Wall Street indexes as analysts try to price in the consequences of tariffs and investors make moves to hedge their investment risks.

These two factors—higher investment risk and market volatility—further create downward pressure on the values of stock in closely held businesses. First, higher investment risk resulting from the uncertainty created by the tariffs is reflected in higher cap rates, giving rise to lower valuations. Second, market volatility is a factor used in the development of discounts that are typically taken when transferring non-controlling interests in private businesses. The unusually high levels of market volatility have created an environment where one of the most significant discounts is calculated much higher than usual. Considering just these two factors, a noncontrolling interest in a closely held business can be in a ballpark of 20-30 percent lower than what would otherwise have been expected. Combine this with the rise in interest rates over the last few years and it is not unusual to see a combined effect of a 40-50 percent reduction in value for a non-controlling interest in 2025 compared to its pre-pandemic value. Given these facts, now may be the perfect time to plan transfers for 2025.

This is the type of sophisticated planning R&A CPAs does, in conjunction with the hard work of the estate planning attorneys, to close the loop in the planning process and to maximize planning success for business owners. We work with estate planning attorneys early in the process to provide valuable advice on market conditions, to select transfer dates, or to provide input on other relevant matters.

Is 2025 turning out to be a great year? It is if you are a business owner who: (1.) is in the process of estate planning transfers this year, (2.) has not yet started estate planning, or (3.) is doing succession planning via stock compensation.

If you need help with your transfers in 2025 to maximize the success of your estate or succession planning, we are just a phone call away.