The advantages of a Family Limited Partnership (FLP) are that ownership of private business or real estate assets can be passed to the owner’s heirs over time at a taxable value far below the true economic value of the assets; and owners do not lose control of the assets during their lives.

FLPs (as well as LLCs) are tax efficient vehicles for transferring wealth as long as they represent a legitimate business purpose. The IRS has increasingly challenged on grounds that a FLP serves no business purpose and has only been established to minimize tax on transferred wealth. The best way to ensure that the FLP has a business purpose is to place assets like commercial real estate or private business shares in the FLP. The general partner can still control the business through his/her partnership status in the FLP. Over time, the donor can gift partnership interests of the FLP to his/her children. These are limited partner interests and are thus subject to discount for control, which is in the hand of the general partner, and for lack of marketability.

The discounts for the limited partner interests not having control vary by the type of asset. For example with real estate properties, the valuation analyst must review closed-end real estate funds holding similar types of properties to get a market-determined difference of this discount. Analogous approaches are used to determine the control discounts for private company stock and other types of assets. The lack of marketability discounts generally apply to all of the interests in the FLP, since this entity is not publicly held. It is important that the lack of marketability discount be supported by reliable empirical evidence. Through the combination of control and lack of marketability discounts, the assets can be transferred at a taxable value substantially below their true economic value. Well-constructed FLPs with defensible discounts remain an important estate planning tool. Please contact Axiom for more information on this topic.

One of our valuation clients has asked us to help identify interested buyers for a very successful, specialty grocery store in Southern New Hampshire. Over the past twenty-five years, the business has grown every year in sales and profits. In fiscal 2004, sales were $4.16 million and seller discretionary earnings were $750,000—all reported on the tax return. The product lines that drive this excellent profitability are: prepared on-site entrees, meat, in-house baked goods, and the deli. The store also sells wine and beer. There is room for expansion to offer even more high-margin items. The owner and his wife are in their early 60s and want to retire. Please contact Axiom if you know of a potential buyer for this remarkable business.

The short is yes. The method most often used to value trade names is known as the Relief from Royalty method. This method asks, how much would the firm have to pay an unrelated party to license the use of the trade name. The license fee is typically an agreed upon percent of sales over some stipulated time. Royalty rates vary from a low of 1% to a high of 10% or more with close to 90% being 10% or less. Once the royalty rate is established, the value of the trade name is then equal to the sum of present value of after-tax cash flows that the hypothetical licensor would receive. Determining the correct royalty rate is complex. Axiom has developed a model, recognized by lenders, as a viable approach to valuing intangibles. Please contact Axiom if you have any questions regarding the valuation of intangibles.

Dr Feldman’s new book, Principles of Private Firm Valuation (Wiley, 2005) is now available. Click the link below for online ordering, or order a copy at your local book store. One of the reviewers, Mark Beucler, CFO of Lifeline Systems, wrote:

“CFOs of public firms are intimately involved in valuation issues related to acquisitions and divestitures. As private firms are targeted for acquisitions, CFOs of private firms will be increasingly relied upon to offer advice and guidance to owners.  For finance professionals that desire to raise their level of preparedness for the valuation questions that will certainly come, this book offers an excellent start. Principles clearly addresses a number of complex private firm valuation issues including determining the cost of capital, and the importance of transparency and liquidity to establishing the value of a private firm.  For those interested in private firm valuation, I highly recommend Principles.”