How to determine the actual value of K-1 shares for private company buyout offer

Thanks for this info! Quick follow-up question - would the "Capital Account Analysis" section on the K-1 give any hints about the current value? Also, if distributions have been increasing year-over-year, does that suggest the shares are worth more than we paid?

The Capital Account Analysis section can provide some insights, but it doesn't directly reflect current market value. This section shows your basis in the investment for tax purposes, including your initial contribution, increases from your share of income, and decreases from distributions. It's more of a tax tracking mechanism than a valuation tool. Regarding increasing distributions, that's definitely a positive sign! If the company is distributing more money to partners/shareholders each year, it typically indicates improving financial health. This would suggest the business (and thus your shares) may be worth more than when you purchased them. Calculate the annual return rate based on these distributions compared to your initial investment - if it's substantial, that strengthens your case that the "no appreciation" buyout offer is undervalued.

How accurate is their valuation estimate though? Private companies can be tricky to value even with perfect information, let alone just from K-1s. Did your valuation from taxr.ai end up being close to what your shares were actually worth?

I'm skeptical about any service claiming to value private company shares just from K-1s. There's so much context missing - debt levels, cash positions, market conditions, intellectual property value. How could an algorithm possibly account for all that?

The accuracy was surprisingly good for my situation - their estimate range was within 15% of what an independent valuation later determined. They don't claim to give an exact value, but rather a reasonable range based on the financial data in the K-1s. As for the missing context, you're absolutely right that K-1s don't tell the whole story. But what taxr.ai does well is analyze income-to-investment ratios, distribution patterns, and capital account changes over time, which creates a data-based starting point. They also factor in industry-standard multipliers based on the business type. It's not perfect, but it gives you negotiating leverage when someone's trying to lowball you.

Wait, does the IRS actually have a Business Valuation department that can help with private company valuations? I thought they only cared about tax collection, not helping shareholders determine fair value.

Sounds like a scam honestly. Why would you need a service to contact the IRS? Can't you just call them directly? And I seriously doubt the IRS is in the business of helping random shareholders determine what their private company shares are worth.

The IRS has an Engineering and Valuation Services group that handles business valuations primarily for estate tax, gift tax, and certain income tax situations. They won't provide a valuation service for your specific shares, but they can clarify what information companies are required to provide for tax reporting purposes and sometimes that overlaps with valuation data. You absolutely can call the IRS directly if you have several hours to wait on hold. The point of Claimyr is that they navigate the phone system and wait times for you, then call you back when they have an actual IRS representative on the line. It's not about accessing secret information - it's about saving the 2-3 hours most people spend trying to reach a human at the IRS.

I checked our operating agreement and found nothing specific about buyout valuations, which seems suspicious in hindsight. Box 20 on our K-1 does have some information under code "N" that shows our capital account increased by about 37% over the past 5 years, despite taking distributions. That alone contradicts the claim that the shares are worth exactly what we paid. I also noticed our portion of ordinary business income has been steadily increasing each year (roughly 15-20% annual growth), which seems to further suggest the business is more valuable now than 5 years ago. This definitely gives me some talking points when pushing back on their offer!

That 37% capital account increase plus the 15-20% annual growth in business income are both strong indicators your shares have appreciated significantly. A 5-year-old investment in a growing business being worth exactly what you paid doesn't pass the smell test. When you talk to your CPA, ask them to calculate a rough valuation using capitalization of earnings - essentially multiplying the annual income your shares generate by an industry-standard multiple (typically 3-6x for small businesses). That should give you a reasonable counter-offer baseline.

Smart point. I've seen this happen at my previous company. The remaining partners started taking huge "management fees" and "consulting payments" right before buying out departing partners. The business showed minimal profits on paper while the active partners were pulling out hundreds of thousands in "fees.

You might be onto something! Box 4 shows substantial guaranteed payments that have more than doubled since we first invested. Looking closer at our first year versus most recent K-1s, total ordinary business income hasn't grown as dramatically as I'd expect, but guaranteed payments to partners have exploded. This seems like exactly the pattern you're describing - extracting value through compensation rather than showing it as business growth that would increase our share value. This is exactly the kind of evidence I needed. I'll have our CPA calculate what the business value would be if those guaranteed payments were more in line with industry standards or at least similar to what they were when we initially invested.

This is incredibly helpful analysis! I just checked our K-1s for those specific items you mentioned. The Section 179 deductions have indeed increased significantly over the past two years, and our ownership percentage has remained constant (so no dilution issues). The AMT adjustment in Box 12 code "A" is particularly eye-opening - it shows much higher income than what's reflected in the ordinary business income line. This seems to confirm that the business is performing much better than the guaranteed payments manipulation would suggest. Your point about calculating the actual return is brilliant. If I accept their offer, my 5-year return would be exactly 0% (before considering inflation), while a conservative valuation based on the income patterns would suggest at least a 40-50% total return. When presented that way, their offer looks even more ridiculous. I'm definitely not going to let them rush me. Based on everyone's advice here, it sounds like I have much stronger negotiating position than I initially thought. Thank you for the detailed roadmap!

This is excellent comprehensive advice! I especially appreciate the point about getting everything in writing. I was planning to have a phone conversation with the executive, but you're absolutely right that I should send a formal written response instead. The suggestion about a certified business valuator is something I hadn't considered, but given what we've uncovered about the earnings manipulation, it might be the best way to get an objective assessment. Even if it costs a few thousand dollars, it could easily pay for itself if our shares are worth significantly more than their offer. I'm curious about the securities attorney angle - what specific fiduciary duties might they have breached? Is it the fact that they're potentially manipulating earnings through excessive guaranteed payments, or is there something else I should be looking for in our operating agreement or their communications? Either way, I feel much more confident about pushing back on their offer now. The evidence from the K-1s is pretty compelling, and the pattern everyone has identified gives me solid talking points. Thank you to everyone in this thread - this has been incredibly educational!

This legal analysis is incredibly eye-opening! I hadn't realized that the timing could be so important. Looking back at our K-1s, the guaranteed payments really started ramping up about 18 months ago, and they first reached out to former employees (including my wife) about 6 months ago. That timeline definitely suggests a deliberate strategy. I'm going to compile all this evidence chronologically - the earnings manipulation through guaranteed payments, the capital account growth, the AMT adjustments showing true economic performance, and now this potential fiduciary duty breach. Having it all documented in one place should make for a compelling case whether we go the formal appraisal route or end up needing legal representation. The point about information rights is particularly interesting. They've been incredibly secretive about financials beyond what's required for K-1 preparation. If we have legal rights to more detailed financial information, that could force them to disclose data that would support a much higher valuation. This whole thread has transformed my understanding of our position. What started as a simple tax question about K-1 valuations has revealed what appears to be a systematic attempt to undervalue minority shareholders. I'm actually excited to push back on their offer now - thanks everyone for the incredible insights!