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Issue link: https://securitysales.epubxp.com/i/166764
discount to the enterprise value of K&M; Alarm results in a freely traded value of $5.3 million. T is freely traded value makes no allowance for the lack of marketability inherent in a minority block of nonpublic equity, an important negative element of value. Te existence of a ready market for an investment is of def nite value to the owner, or to a potential buyer, and an investment that possesses such a market is worth more than an otherwise similar investment that lacks such a market. Moreover, the underlying objective of a family-owned business often is to retain ownership of the company within the family. Tus, the shareholder/buysell or operating/partnership agreements of these businesses typically contain provisions severely restricting, and often prohibiting, the transfer of interests to persons outside of the family unit. T is factor may increase the inherent lack of marketability of a closely held business. In the case of a minority interest, discounts for lack of marketability generally range from 20% to 40%. Selecting a discount at the midpoint of this range (30%) would result in an aggregate fair market value for all of the equity of K&M; Alarm of $3.7 million, on a nonmarketable, minority interest basis. Tis conclusion of fair market value, which represents a 47% discount from the enterprise value of $7 million, is the price at which transactions of noncontrolling interests would be valued at for estate planning purposes. POTENTIAL HITCHES IN ESTATE PLANNING Given the current lifetime exemptions, the owner of this hypothetical subject company could transfer any number of noncontrolling interests in the business to family members, key employees or successors without triggering any federal estate and gift taxes. Should this option be foregone and Congress reduce the lifetime estate and gift tax exemptions and the applicable tax rates, the next generation could get stuck with a substantial tax burden should future transfers be made or upon the owner's death. For example, if Congress were to revert the current exemptions and tax rates to, say, their 2002 levels of $1 million and 50%, respectively, the future benefciaries of the subject company would be forced to pay an aggregate tax bill of $1.35 million. Tis efect would be further compounded if the company were to increase in value as time passed. Sometimes such estate planning is easier said than done, as in the case of a senior generation member unwilling to give up control. In such cases, tax and accounting advisors might recommend the creation of a nonvoting class of equity that still allows for the tax-free transfer of wealth but the retention of control in the founder's hands. Te benefts of not doing so are too substantial to ignore. Of course, before proceeding you should consult with your advisors, specifcally your CPA and attorney, before executing any type of succession planning. www.securitysales.com/freeinfo/19249 SEPTEMBER 2013 / SECURITYSALES.COM / 147