Warning: Impairment of Intangible Property

Owners, particularly venture capital firms, of franchise companies that have been acquired within the past decade will have to do in-depth inspections of the booked value of their intangible property taking into account the world economic meltdown during the last quarter of 2008. In light of the fact that IP often makes up more than 70% of the value of franchise companies, it is very likely that many acquired franchise companies will have to take substantial write downs for impairment of IP to conform with FASB 141 and 142. This may have a dramatic impact on both the balance sheet and the earnings statement.

Valuation Formulae Determined in Buy-Sell Agreements

This is an area of importance to any closely-held franchise company. It is surely a best practice for such entities to have Buy-Sell agreements in place to deal with the 3 "Ds": Death, disability and disaffection.

A main purpose of these agreements is to fix a value for the enterprise in advance and to specify how to pay for any contemplated redemption. The case law on this issue is fact specific and often conflicting.

Bommer Revocable Trust v. Commissioner, TC Memo 1997-380, 74 TCM 358, where the Tax Court would not accept a valuation determined by a buy-sell agreement

Estate of Blount v. Commissioner, TC Memo 2004-116, 87 TCM 1316 where the Eleventh Circuit upheld a buy-sell agreement valuation (with a modification that the buy-sell obligation itself be computed as a corporate liability)

Estate of True v. Comm'r, 390 F3d 1210 (CA 10 2004) affirming TC Memo 2001-167, 82 TCM 105, where the Tenth Circuit affirmed the Tax Court which had refused to give any credence to a valuation determined under a buy-sell agreement.

Estate of Amlie v. Commissioner, TC Memo 2006-76, 91 TCM 1029, where the Tax Court found a valuation in a buy-sell agreement binding (among other things).

Read more at the Franchise Valuation newsletter (pdf, 4 pgs)