NPR - CALCULATING THE DISCOUNT FOR INTRA FAMILY SALE OF ASSETS

Abstract:

Intra-family family farm business succession often requires the faming heir to purchase long term assets, land and facilities, from the non-faming heirs. The mechanisms for such purchases include option to buy, right of first refusal and buy/sell agreements. The control of these mechanisms is either in the hands of the buyer or the seller. The common factor is establishing the price to be used in the sale and purchase. Many farm family business succession plans require that asset(s) to be discounted from the fair market value. The discount recognizes the contribution of the farming heir to the preservation and addition to the estate of the owner. The owner generation must strike a balance between the farming and non-farming heirs’ bequests and the ability of the farm business to fund the farming heir’s purchase of the long term assets. A common approach is to discount the sale price to enable the farming heir to purchase the long term assets. Herein lies the problem: By what amount should the sale price be discounted? A second, but equally difficult problem, is how to insure the farming heir does not receive a windfall profit from an immediate sale of the long term assets after purchasing them at a discounted price. A useful approach is to determine the amount of debt service that the farm business can absorb. The second problem can be resolved by requiring a shared appreciation agreement for the purchase of the long term assets at a discounted price.

Key words: Succession, Discount, Appreciation, Buy/Sell, Intra-family, Estate, Planning