The title is based on one of my favorite Far Side (RIP) cartoons depicting a guy rising from bed and looking at a wall poster with that as the text. I remember learning this the hard way when I was figuring out how to dress myself 55+ years ago.
How many times have you received a request like this? “I am selling my company, and the deal is closing next week. I want to transfer [a minority interest] to [an heir, an affiliated entity, a defective grantor trust, etc.] with discounts [for lack of control and lack of marketability]. How big will the discount be, what will the appraisal cost, and can you get it done by then?”
My immediate mental response is “0%, sure, and $0” because I am not going to take on this job! Why? Because the potential client put their shoes on before their pants: the shoes are closing the deal and the pants are the interest transfer.
The fact that the deal is closing next week is PARAMOUNT. It removes all of the uncertainty about the transaction price (assuming for simplicity that: (1) there are no obstacles to closing; (2) there is no contingent consideration such as an earn-out; and (3) 100% of the company’s stock is being sold)). There is no lack of control discount because all of the stock is being sold. There is no lack of marketability discount because the transaction establishes the “market” price.
Occasionally I might agree to a small, on the order of 5%, discount for the risk that the deal might not close, but there has to be a good basis, such as unresolved contingencies precedent to closing or the buyer’s inability to obtain financing. In the dotcom era I opined discounts as high as 25% for pre-revenue companies that aspired to go public…but those days are long gone.
Revenue Ruling 59-60, Section 3, Paragraph 3 tells us that information known or reasonably knowable as of the valuation date is relevant, and that transactions subsequent to the valuation date that indicate value are relevant if they indicate but do not affect the value. Both apply.
This client SHOULD HAVE done the minority interest transfer WELL BEFORE embarking on the sale of his business, thus putting on his pants before his shoes. I wish I could state exactly HOW LONG before, but that is a matter of common sense, informed judgment, and reasonability that is heavily dependent on the facts and circumstances of each case. I think that a year or more is fairly safe, but there are times when things change or happen faster, and I cannot generalize usefully about that.
Don’t take on an anxious client’s problem (putting on their shoes before their pants) when they have not done their estate planning before their transaction planning.