Situation

The National Christian Foundation (NCF) operates a donor-advised fund that accepts contributions of minority business interests. Minority business interests are illiquid assets, and as such, donors who gift shares of their privately held company, often purchase them back to provide the liquid gift of cash.

In one instance, two shareholders of an engineering company located in Texas desired to purchase back a minority interest that was previously donated to NCF by two other minority owners in the company. In cases such as these, NCF often issues a seller note to facilitate the transaction. NCF engages an outside expert to confirm that the terms of the note represent the fair market value being paid for the interest.

Engagement

NCF hired Mariner Capital Advisors to assess the seller note and determine its reasonableness as a mechanism for NCF to obtain the fair market value purchase price for the interest at stake. Mariner Capital Advisors first reviewed the buyers’ (that is, the original donors’) credit history and personal financial statements to assess the buyers’ creditworthiness. We then developed hypothetical scenarios illustrating cash flows that would be available to NCF by executing the transaction. These hypothetical cash flows varied depending upon different duration calculations and reinvestment assumptions. We also evaluated the reasonableness of the terms of the note by comparing them to traditional and expected loan terms and market data.

Result

Our business valuation professionals determined that the terms of the seller note could not be regarded as being fair market value because the interest rate on the note was not appropriate considering the amount of risk inherent in the transaction. After discussions with Mariner Capital Advisors, NCF agreed to raise the note’s interest rate by 1.5%, to a level more reasonable given the buyers’ risk profile.

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.