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When a faulty CrowdStrike software update crashed roughly 8.5 million computers in July 2024, few could have predicted the massive financial fallout that followed. One of the biggest impacts was on Delta Airlines, which is now pursuing legal action. As an economic damages expert, I’ve seen many corporate disasters unfold, but this one stands out for both its scale and complexity. The Immediate Hit: $500+ Million Out of Pocket The most tangible impact sits at over half a billion dollars in immediate losses. Think about what happens when an airline suddenly can’t access its computer systems. It’s not just about canceled flights—though 7,000 cancellations over five days is staggering. It’s about the domino effect that follows. Picture thousands of stranded passengers needing hotels and meals. Consider the logistics nightmare of repositioning crews who are suddenly stuck in the wrong cities. Imagine the scene at airports as staff scramble to manually handle operations that are usually automated. Each of these scenarios comes with a price tag, and they add up quickly. The technical recovery itself was a massive undertaking. Because CrowdStrike’s update prevented remote fixes, IT teams had to physically access each affected computer. That meant countless hours of overtime, emergency technical support, and an all-hands-on-deck response that strained both human and financial resources. Future Revenue Losses The future revenue impact is harder to quantify. Think about it from a traveler’s perspective: You’re planning a family vacation or an important business trip. Although many airlines were affected, Delta was by far […]

It’s 2024, and Bennifer is splitting up again, this time with real consequences. The divorce of Ben Affleck and Jennifer Lopez has sparked quite a conversation in our office this morning, and although I don’t plan on becoming a gossip columnist, I wanted to provide some healthy speculation based on my 35+ years as a financial expert, often retained for divorce cases. Understandably, there is nothing romantic about a prenup, but without one, all the earnings and assets made during their union may be considered community property. This situation highlights the importance of financial planning before marriage, especially for high-net-worth individuals. Despite their relatively short marriage, both Lopez and Affleck have been incredibly active professionally. Affleck has starred in two films and produced two others, while Lopez has starred in four films herself. Not to mention the $68 million mansion they purchased jointly—a 12-bedroom and 24-bath property that now becomes a significant asset to be divided. Before you ask, “Why wouldn’t they get a prenup?” or “Who the heck needs 24 bathrooms?” the real question should be: What’s two years of accrued assets for a couple with a mid-nine-figure net worth? Although Lopez is considered the “monied spouse” in this scenario, with such high individual net worths, it is unlikely that these divorce proceedings would lead to any “nickel-and-diming.” This is especially true considering that she filed for divorce “pro se” (or “pro per”), meaning that she chose to represent herself initially. Representing yourself as a pro se party in […]

Make no mistake about it: Analyzing and understanding the subject company’s financial statements is paramount when opining on value. However, when you start “peeling the onion,” other factors play an important role.  This is why you can value two similar businesses simultaneously and arrive at different values. Key valuation drivers range from a business’s culture to tangible assets and/or intellectual property. The following provides just a few that should be considered beyond a company’s financial composition. Customers & Competitors Dependency on a few or limited customers will almost always make a business vulnerable.  In other words, a diversified customer base is almost always preferable.  A customer base extending across several geographic regions or market sectors may add even greater value than expected.  This is not just a valuation expert speaking but a sentiment many sophisticated buyers share. Industry An industry by itself can also be a valuation driver – particularly if the sector is expanding rapidly, like AI. Business analysts are often attracted to startups in a young, hot industry – rather than one solely dependent upon organic growth. Keep in mind that you can’t use industry as your sole determinant of value.  Value and the valuation process are acknowledged when a company distinguishes itself from the herd. Internal assets Favorable internal factors may also drive a company’s value. Although these factors may not be as clear as financial performance indicators, one should assess the following attributes when determining value: Management talent: Is the subject company’s management team capable of running […]

There is a new Netflix docuseries, Depp vs. Heard, which covers the Johnny Depp and Amber Heard trial—one of the most publicized trials this decade. Whatever personal biases you may have toward the case’s outcome, it’s a compelling case study of economic damages. Depp’s team presented evidence of his alleged lost earnings due to Heard’s accusations. A forensic accountant took the stand and analyzed Depp’s career trajectory, past earnings, and potential future earnings to estimate the financial impact of the allegations on his career, including presenting this helpful demonstrative to the jury (recreated): Likewise, Heard’s expert presented evidence of financial losses she allegedly suffered due to Depp’s actions. However, she didn’t have the economic damages or forensic accounting credentials Depp’s expert possessed, which became apparent during her cross-examination. Lost profits and economic damages are not independent causes of action in litigation. Rather, they are a damages remedy when a legal wrong has caused financial harm. Quantifying these amounts can be one of the most challenging aspects of a damages case. Calculating hypothetical profits requires deep financial analysis, the application of accepted methodologies, and consideration of market factors. For more information about… Proof and evidence for lost profits Ex-ante & ex-post approaches Loss of business vs. loss of profits Methods for determining economic damages & lost profits Download “An Attorney’s Guide to Lost Profits and Economic Damages”

A simple Google search for “PPP fraud” will bring you to hundreds of local news stories of recently indicted individuals and business owners alike defrauding the COVID-era Paycheck Protection Program. Nearly four years later, authorities have investigated 1,644 cases of tax and money laundering related to CARES Act fraud, with potential losses estimated at $8.9 billion. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 29, 2020, provided over $2 trillion in economic relief to help Americans navigate the financial challenges brought on by the COVID-19 pandemic. The CARES Act initially authorized up to $349 billion in forgivable loans to small businesses through the Paycheck Protection Program (PPP), with Congress later approving an additional $321 billion in PPP funding. In addition to the PPP, the CARES Act authorized various other relief programs, including the: Economic Injury Disaster Loan (EIDL) Economic Impact Payments (EIP) Provider Relief Fund (PRF) Pandemic Unemployment Assistance (PUA) Federal Pandemic Unemployment Compensation (FPUC) As the United States continues to grapple with the aftermath of the COVID-19 pandemic and its economic relief efforts, President Biden signed two bills into law that provide the Department of Justice and other federal agencies with more time to investigate and prosecute fraud charges related to these COVID-relief programs. These bills extend the statute of limitations for PPP and EIDL fraud charges to ten years. In the coming months, we may see the passing of the Fraud Prevention & Recovery Act, introduced by Senator Gary Peters (MI) in […]

Discussing hidden cash and unreported income is always a popular topic for both commercial litigators and family law attorneys. Currently, we are working on several engagements that have developed into full-fledged forensic accounting and fraud investigations. Experts (as well as IRS investigators) look at key areas to prove that cash is missing and to estimate how much income the business owner may not be reporting. Hidden cash can be discovered by taking a closer look at: Bank deposits: These can be used to reconstruct income by analyzing the parties’ bank deposits, canceled checks, and currency transactions, accounting for cash payments made from undeposited currency receipts and non-income cash sources, such as loans, gifts, inheritances, or insurance proceeds. Sources and use of funds: Here, the business owner’s personal sources and uses of cash are analyzed to determine where the owner’s income and other funds came from and how they were eventually used. If the owner is spending more money than they are taking in, the excess may represent unreported income. Net worth: An unsubstantiated increase in a business owner’s net worth can reveal unreported income. Telltale documents such as bank and brokerage statements, real estate records, and loan or credit card applications are often used to define this increase. The net worth gain is calculated, reported income is subtracted, and the amount is further adjusted to reflect any nondeductible expenditures and non-income sources of funds. Percentage markup: Net income is often estimated by applying a benchmark profit percentage to sales or […]

My first in-depth experience understanding non-compete agreements was in graduate school (many years ago). At that time, the examples only included transactions between large, publicly held companies, so when I handed my very first non-compete valuation to the attorney, I was shaking like a leaf in a hurricane. As the years went on, we’ve been asked to value such agreements more and more. I saw that non-compete agreements involving closely held businesses become “standard fare,” with 30 million Americans subject to this restrictive covenant. However, the landscape has dramatically changed with the Federal Trade Commission’s final rule issued on April 23, 2024, which bans most non-compete agreements. Under the new rule, existing non-competes are no longer enforceable, with narrow exceptions including senior executives earning over $151,164 annually in policy-making positions (less than 0.75% of workers). Employers are also prohibited from entering into any new non-competes, even with this small subset of executives. The final rule also includes a limited exception that hasn’t been as publicized: non-compete clauses are permitted in connection with the sale of a business entity, a person’s ownership interest in a business entity, or substantially all of a business entity’s operating assets. The final rule eliminates the proposed 25 percent ownership requirement for the seller. Prior to the FTC ban, non-compete agreements helped businesses retain valuable employees, safeguard inside information, and prevent unfair competition. When valuing a non-compete, we considered several factors, such as the overall business value, probable damages from a breach, likelihood of competition, and […]

When valuing a closely held, private company, it is important to recognize that the process may be more complex than valuing a publicly traded one. While valuation experts apply discounts at both the entity and shareholder levels, this blog will focus on exploring the various types of shareholder-level discounts and their impact on the valuation of closely held companies. Shareholder-level discounts are applied specifically to the value of an individual shareholder’s interest, accounting for the unique risks and limitations associated with owning a specific ownership interest. These discounts are used in the valuation process to arrive at a more accurate representation of the fair market value of a shareholder’s interest. Discount for Lack of Marketability (DLOM) Selling shares and liquidating funds is not as simple for a private company as for a publicly traded company. In a public company, shareholders can typically sell their shares on a stock exchange and receive the proceeds within a few days. However, this is not the case for closely held companies, where selling shares can be lengthy and complex due to the lack of a readily available market. The discount for lack of marketability is one of the most frequently applied discounts in valuing closely held companies. This discount reflects the difficulty of selling or liquidating ownership interests in a private company compared to a publicly traded one. The DLOM is used to account for the limited liquidity of closely held company shares and the potential difficulty in finding a buyer. Additionally, legal and […]

When valuing any business, one of the most important factors to consider is the overall market environment. After all, market conditions have an enormous influence on a company’s performance and what buyers are willing to pay. Privately owned businesses have more protection from immediate market fluctuations than publicly traded companies. But over the longer term, market forces always make their way into financial statements and operational health. In a strong, growing economy, valuations tend to be more generous when demand is high and access to capital is easy. Buyers have more confidence that a target business will continue thriving, allowing them to forecast future solid cash flows. This leads them to place higher multiples on a company’s earnings. Of course, the reverse is true in weaker, uncertain economies as well – buyers become more conservative in their projections, and valuations reflect that uncertainty. Market swings can impact industries and niches very differently, too. For example, a recession may completely deflate valuations of discretionary consumer businesses like gift shops when households pull back spending. As we saw during the result of the pandemic, demand for discount retailers and certain services may remain stable or even grow during downturns. Evaluating the market’s impact requires a nuanced, segment-by-segment analysis in addition to big-picture economic factors. An accurate business valuation must determine how the current market will likely affect future operations. As experts, we analyze historical performance, competitive forces, supplier costs, commodity prices, consumer demand, access to labor, and other external variables that impact […]

When representing a client with a business valuation report in hand, attorneys must look beyond the numbers at face value. Though you often leave the financial modeling and technical details to the valuation experts, a keen understanding of valuation inputs remains imperative for attorneys on either side of a transaction or dispute.  The capitalization rate (a.k.a. the “cap rate”) is among the most impactful business valuation inputs. This factor warrants particular scrutiny, as variations of even 0.5 percent can alter the valuations significantly. Properly vetting this input is essential to achieve an accurate valuation that stands up to legal scrutiny. To add another instrument to your toolbelt, we will provide a quick primer on the cap rate and its components. What is the Capitalization Rate? The capitalization rate is the rate of return used to convert a business’s annual earnings or cash flows into an initial company value, accounting for risk and growth prospects.  Computed as the difference between the discount and growth rates, the cap rate involves a nuanced evaluation of multiple factors. Attorneys should be familiar with these items to interpret their credibility quickly. Discount Rate The discount rate is the annual rate used to convert projected future cash flows into present value, reflecting the riskiness, time value of money, and required rate of return an investor would expect on the investment. The most common components used when computing the discount rate are: Risk-free rate of return Equity risk premium Size Premium, and Company-specific risk premium Generally, empirical […]