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Do you know what your business is worth? Our business valuation experts provide you with an objective, expert view of your company – while helping you understand the value drivers of your business. In addition to preparation for sale, knowing the actual value of your business is crucial for a number of reasons:
Your business' balance sheets and financial statements are not enough to present the true value of your company. An accurate valuation requires a customized approach. Our Certified Valuation Analysts integrate basic valuation principles with the very latest developments in business valuation theory to arrive at the most comprehensive valuation possible. We can also help you comply with the complex requirements of the Statements of Financial Accounting Standards (SFAS) Nos. 141 and 142. These standards require companies to perform a valuation to determine the current fair value of intangible assets and goodwill acquired in a business combination or merger and to periodically test previously recorded goodwill and intangibles with indefinite lives for impairment. For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.
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Valuations Insights, Third Quarter, 2008 Can You Take it With You? Court Revisits Family Limited Partnership Discounts In the Matter of the Estate of Norman B. Hjersted, 2008 WL 269013 (Kansas) February 1, 2008 In deciding the first incarnation of the Hjersted case in 2006, the Kansas Court of Appeals held that discounts for lack of marketability and control did not apply to a family limited partnership (FLP), particularly when its purpose was to disinherit Mr. Hjersted's wife of nearly twenty years, to the benefit of of his son by a prior marriage. The son appealed to the Kansas Supreme Court. Discounts create 'illusory layers of ownership' Prior to his death, Mr. Hjersted created an FLP to hold all the outstanding stock (500 shares) of his closely held company. He became a 96% limited partner in the FLP and a 2% general partner; the remaining 2% belonged to his son. Three years later, Hjersted transferred his 96% limited partnership interest to the son as part gift/part sale. The transaction stipulated that the gift was worth $675,000, the then-maximum allowable amount without incurring federal income tax. To carve out this gifted portion, an appraiser valued the 500 shares at $4,500 per share and the company at $2.25 million. He then subjected the 96% limited partnership interest to combined, layered discounts for lack of marketability and control equaling 32.5%, for a total fair market value of approximately $1.46 million. When Mr. Hjersted died a year after the transfer, his wife sought her statutory elective share of the estate. At trial, her valuation expert determined the fair market value of the company's 500 shares as of the transfer date; he was not asked to—nor did he consider—its value "as contained within" the FLP. He valued the company at $2.66 million, to which he applied a 10% marketability discount. Accordingly, the 96% interest was worth just over $2.55 million. For the most part, the trial court agreed, and after certain reductions, it valued the wife's elective share at $1.175 million, and the son appealed. The appellate court upheld her expert's valuation. Discounts injected too much speculation into the appraisal, the court said, and were inappropriate when the transaction unified ownership into one individual. Moreover, applying discounts could help create "layers of illusory ownership for non-probate transfers…in furtherance of a scheme to disinherit a spouse." Supreme court offers 'contours of guidance' On review, the Supreme Court focused on a fine legal distinction: As a rule, an appellate court "does not weigh conflicting evidence, pass on the credibility of witnesses, or redetermine questions of fact." But in this case, the appellate court overstepped its bounds. In rejecting the discounts used by the son's appraiser, its analysis revealed a de novo review and resulting legal conclusion. However, it did not subject the wife's appraiser and his 10% discount to a similar review: Consequently, the Court of Appeals' decision ultimately made case-dispositive a valuation that made no pretense of addressing that court's paramount issue: value of the [FLP] interest on [the transfer date]. The trial court found that the FLP was a valid transfer, and rejected the wife's argument that its nature was illusory or for a non-business purpose. Accordingly, the Court of Appeals could not revisit this conflicting evidence and then rely on the purported artificiality of the FLP to conclude that the combined discounts were unnecessary, the Supreme Court held, and reversed the appellate holding. The valuation of the FLP interest was "best left" to the trial court, which would—at a minimum—address the validity of the combined 32.5% discounts in the original appraisal. "We cannot prognosticate all the factors that the…court could decide to consider in this value determination," the court said. At the same time, it offered "some general contours of guidance" regarding the application of lack of marketability and control discounts. Policy on discounts 'at odds' For example, tax courts have allowed combined discounts for FLP interests "ranging from 25% to 35% and sometimes even more." These decisions usually turn on findings of legitimate business and estate planning interests. At the same time, courts generally do not apply discounts in dissenting shareholder actions, because they penalize minority shareholders while unfairly enriching the majority; and Kansas is among the majority of states to disallow discounts in this context. On remand, the trial court should consider whether the wife's situation was comparable to a minority shareholder and entitled to an undiscounted value, the Supreme Court said. Likewise, in the probate area, the trial court could find that the FLP represented"legitimate steps toward a legitimate estate planning and business objective." Or it could find (as it did during the original trial) that the appraisal at the time of the transfer suffered from an "inherent bias," because it sought to minimize the tax consequences—a purpose inconsistent with that of the spousal elective share. Finally, the trial court could find parallels in state divorce law, which did not clearly prohibit application of discounts. Overall, the many sides of the debate further supported the district court reconsidering this decision, "so it may continue addressing, if not balancing, competing considerations." |
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