I commend you on your moral compass. Nothing wrong with selling to private party, disclosure is what I'd do. Buyer's don't only look for pristine low mileage 100's, some like me look for projects. But maybe it's a keeper, you decide.
@ponytl 's got a good handle on engine swap. Which is certainly one you should consider. It really comes down to how clean is this 100. A valve job or engine swap and some ball joints are not that big a deal. Ball joint and bushing ect. are to be expected with age. If you read through his post you'll see he also recommends timing belt job during swap. Aisin complete belt kit was just pointed out to me ~$170 at:
More Information for AISIN TKT001. Seal kits are ~$50 if needed, plus $40 for 2 jug of Toyota Red LL coolant. You'll just need the FSM, some hand tools, engine hoist (rental) AND time. You'll learn a ton.
But, first thing I'd do is verify your shop findings. In this case it's supper easy. Go back and ask them to show you the burnt valve, so you have better understanding. They may do this without charge, as they know which cylinders to look in. 15 minutes tops, to pull engine cover, spark plug and run the camera in, then button up while sipping a coffee. They may offer a stored picture they can email you, great post it here. But I'd want to see in person as well. Sorry but what I've seen of "top shops" just this last year is criminal. No what to look for
Burnt valve - Google Search just because it black with carbon, is not a burnt valve. Burnt means metal of valve has melted.
For a second opinion, I recommend sticking with Toyota Dealer. Better yet, find a specialist that only works on Land Cruiser / LX. Shop like Slee Off Road we've here in CO, can be recommend by your local mud members. Either case go into shop and get to know your mechanic.
You can also do a compression check. You just need a compression gauge (~$30) and socket set (~$20). Will help you through it, it's fun, easy and you'll have the tools and knowledge forever.
I've just been doing a cost annalist on a 98LX I purchased a few days ago. I bought for parts, but wanted to see if restoration made senses. It's has many issues, one being a leaky head gasket. My cost on stopping leaky head gasket runs anywhere from $60 all the way up to doing complete A1 factory spec valve job on both heads about $1,000 ($750 of that machine shop). In my case I found most issues on inspection. Admittedly not the head gasket leak (in a hurry) but didn't care much. After running the numbers, I decided partout or sell as parts rig is best in my case. It's really not that much money for me to restore, but value will not be their when I'm done. But I'm good with that, it's just how the number fall.
In your case if you find it does need this work, you can see from all the post you have options. Key will be what the finished products worth to you. Paying some shop a billion gazillion bucks is not one of the options in my book.
