Page 50 - Business Valuation for Estates & Gift Taxes

Some factors that need to be considered but may not be found in the agreement include the following:

 Size of the interest

 Number of investors in the partnership

 Type of assets owned by the partnership

 Whether or not the assets of the partnership are well diversified

 Current and historical amount of cash actually distributed to partners and assignees

 Underlying cash flow coverage of yearly distributions made to partners and assignees

 The "default rules" under state law

 The reputation, integrity, and perceived competence of the partnership management and general
partner(s)

 Amount of financial leverage inherent in the partnership's capital structure

 Caliber of the information flow from the partnership and the general partner(s)

 Universe of interested buyers

The assets held by an FLP typically include investments such as cash, stocks, bonds, private equity in-
vestments, hedge fund interests, and real estate. In order to maximize the value of creating the FLP, the
assets placed in the FLP should be expected to appreciate. Personal assets, especially a personal resi-
dence, should not be placed in an FLP, as doing so could jeopardize the status of the FLP because of the
requirement that the FLP have a legitimate business purpose. In addition, placing a personal residence in
an FLP could deny the taxpayer certain advantages upon the sale of the property. Also, the creator(s)
should not transfer all personal assets to an FLP; the creator(s) should maintain enough assets to pay
personal bills without relying on the FLP for distributions.

Valuation Considerations

Valuation of an interest in an FLP requires much of the same analysis as the valuation of an interest in
any other closely held company. Each of the three basic valuation approaches must be considered. The
approach that is relied upon most heavily will depend on the circumstances of the subject interest.

Historically, many valuation analysts have utilized a valuation method under the asset-based approach to
value an FLP. Although less common, a valuation method under the income or market approaches may
also be used.

Under the asset-based approach, the net asset value (NAV) of an FLP is generally considered the
amount for which a controlling ownership interest could liquidate the underlying assets and liabilities
(although note that the valuation of these assets does not include the costs to sell these assets). In other
words, the NAV is the sum of the total market value of an FLP's assets minus its liabilities. In order to
determine the company's NAV, the analyst typically starts with the reported book values of assets and
liabilities, as of the valuation date, and adjusts them to their current fair market values. Establishing the

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