By Tim Stuhlreyer
Timing Really is Everything
The recent on again, off again acquisition of the LA Clippers by former Microsoft CEO Steve Balmer highlights the need for timely estate planning. A review of recent transactions of NBA franchises (with 2014 Forbes estimated franchise value) prior to the LA Clippers' potential transaction helps to illustrate this point:
- 2014 - Milwaukee Bucks Sales Price $550 million (Forbes 2014 Value Estimate $405 million)
- 2013 – Sacramento Kings Sales Price $534 million (Forbes 2014 Value Estimate $550 million)
- 2012 – Memphis Grizzlies Sales Price $377 million (Forbes 2014 Value Estimate $453 million)
- 2012 – New Orleans Pelicans Sales Price $338 million (Forbes 2014 Value Estimate $420 million)
For comparison's sake, Forbes estimated the value of the Clippers to be $575 million in 2014 versus the winning bid of $2.0 Billion (with a Capital B) by Steve Balmer. Reportedly, the next highest bidder was also over $1.5 Billion. While none of the other franchises listed above enjoy the benefits of being located in Los Angeles, or the Clippers' number of highly marketable players, their values have most certainly been impacted positively by the new going rate for an NBA franchise.
This has what to do with estate planning?
Why is this significant? The owners of these franchises may not have been proactively transferring their franchise to their heirs which means those transfers just became much more costly. The Clippers' market value is now approximately 3.5 times the Forbes estimate. Using the Milwaukee Bucks as an example, previously a 1% interest (given the low level of reporting for these transactions, a simplifying assumption that the published sales price is all equity has been utilized) was estimated to be worth $5.5 million; however, applying the new Clippers' inflation factor results in a 1% interest closer to $20 million. That change may certainly impact your estate tax plans.
Additionally, in the case of the Clippers, the fact the sale is imminent potentially impacts the level of discount for lack of control. If the Clippers' owners planned on making some additional transfers, but did not execute the transfers until after the sale, those transfers could be based on units of a partnership holding cash rather than an NBA franchise. This could negatively impact the size of the lack of control discount as a portfolio dominated by cash carries far less risk than ownership of an NBA franchise, and thus the elements of control are not as significant.
But, I don't own an NBA franchise?
This recent activity may have created a less than optimal estate planning situation for owners of NBA franchises – but what does this have to do with you if you're an owner of a small, family-owned business in Texas? The impact of recent transactions in your industry can have a similar effect on the value of your company. And, the same need for timely estate planning exists. Especially if your intent is for the next generation of the family to assume the business, or if the most viable option is to sell your company upon retirement. Waiting until a sale is imminent could have significant repercussions from value and level of control impairment points of view.
Having a value for your private company provides the necessary information your planning team needs to consider all alternatives and develop the plan that most efficiently executes your professional and personal goals. Not having an idea of what your private company is worth puts you in the difficult position of possibly paying more taxes upon the transfer of your assets to your heirs than would have been necessary if proper planning had been undertaken.
Where can I get help?
The professionals at Convergent Capital Appraisers possess in-depth knowledge of the applicable IRS code sections, rulings (including Revenue Ruling 59-60) and court decisions regarding appraisals of all types of closely-held business equities. We are also accustomed to working with business owners and management, attorneys, CPAs and other estate planning professionals throughout the valuation process.
Some general use classifications of valuations for businesses, succession planning or business transaction engagements we are regularly involved with include:
- Gift, estate and tax valuations
- Merger / acquisition consulting
- General management planning
- Buy-sell agreements
If you have questions about how we can be of service to you, please give us a call or complete our on-line contact form. We would be glad to discuss your particular situation with you, and work with you and your advisory group to help you achieve your particular estate, succession or business transaction planning objectives.