Posts Tagged ‘MINORITY INTEREST’

DISCOUNTED VALUE OF A MINORITY INTEREST IN AN LLC OR A PARTNERSHIP

Thursday, May 21st, 2015

While there has been a great deal of litigation regarding the discounted value of a minority limited partnership interest, a holder of a limited partnership interest may realize an economic benefit only if the controlling general partners approve of the transaction. This restriction is severe and certainly limits the ability of a minority limited partner to find a willing and able buyer to purchase such an interest.
What is a minority partnership interest worth to a willing and able buyer, who cannot:

1) Sell the partnership interest,

2) Force a liquidation of the partnership to obtain a pro-rata share of partnership assets,

3) Make a general partner distribute cash in an amount equal to pro-rata share of current income,

4) Withdraw from partnership as a partner and obtain a pro-rata share of partnership assets, or

5) Cause a premature termination of partnership before the earlier of its 30 year duration or the termination of its business activities? Practically nothing.

Not only does the minority partnership interest, subject to the above conditions, have a limited value to a willing and able buyer, but also the minority partnership interest may have no significant future or present value to the holder of the minority interest. The value of a minority partnership interest to a family member will depend upon subsequent events. If the cash flow from the minority partnership interest proved to be positive, the minority partner realized the economic benefits of owning the investment. Even where there was no cash flow to a minority partner, the investment may be satisfactory to the minority partner if the income was properly reinvested.

In rare situations, a family limited partnership may became a financial disaster. To illustrate, suppose the father was the general partner. After the formation of the family limited partnership, the father was subsequently divorced from the mother in the aftermath of a family dispute over the control of various business enterprises. Furthermore, assume the father subsequently remarried and disinherited his first family as a result of the family dispute. What was the value of the minority interest to a family member, who became a minority limited partner? Practically nothing.

In a worse case scenario, the minority partnership interest could have a negative value. This could transpire if the holder of the minority interest had partnership income reported on a K-1 each year but never received any cash distributions from the family limited partnership. In some instances, this has driven the holder of the minority interest to the brink of financial disaster.

These type of unexpected, rare situations have occurred and will continue to happen, due to unexpected subsequent events.