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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 […]

Picture as you may, a matter that requires testimony regarding the fair market value of a closely held business. Like most cases of this instance, the matter will be highly contentious. I am not writing about either side’s expected arguments or their respective merits. In this instance, I want to discuss how counsel for each party organizes their material before the Court. Specifically, the income tax returns the financial experts used to form their underlying opinions. We have all witnessed this scene before. Counsel for each party rolls in boxes of documents in anticipation of a lengthy trial and proudly lines the front of their desk with their respective “Trial Binders.” Each binder is indexed, labeled, and, if lucky, already pre-marked as Exhibits. And, of course, courtesy hard or electronic copies are provided for the Court. Amongst these documents are the Subject’s personal and business income tax returns. The Subject’s income tax returns are pivotal to all stakeholders: the Plaintiff, Defendant, and even the tax preparer, who may be called to testify as a fact witness –  not to mention your valuation expert who has written a report and will testify to their opinion of fair market value. Now comes the purpose of this article. The Plaintiff begins their case and refers to a specific page and tax return within their trial binder. You turn to that page and find identifying the referenced line item impossible. You ask your adversary and the Court for clarification, hoping a negative reference to […]

  Many law firms and their clients have applied for the available federal and local loan and grant programs. Despite the promise for quick financial assistance, many businesses (including law firms) still face financial difficulties due to the Coronavirus Pandemic.  The Payroll Protection Program (“PPP”) was established to provide immediate financial assistance to businesses that employ five hundred employees or less. The money set aside for the PPP was entirely distributed within days after the application process began.  We are now hoping that the government replenishes the program. As it turned out, a significant amount of this money was disbursed to businesses that technically meet the SBA’s criteria, but are actually much larger companies, which are not intended to benefit from this stimulus package. Companies, such as Shake Shack, are returning the $10 million it received in the hopes that the money will be redistributed.  Shake Shack is not the only large company to have benefited from having the infrastructure to quickly get ahead of the line for this money earmarked for small businesses. The realization that our economy’s financial weaknesses are now being exposed.  Despite the prior peaks in the stock market, it is now clear that the adage: “What’s good for General Motors is good for America,” is just not true. Despite the current financial assistance being offered, tens of millions of workers are now unemployed, and many businesses are not expected to withstand the financial pressures caused by the current business interruption. Individuals and business owners are […]

Our firm was recently retained to determine the fair value of a minority interest in a business for a shareholder dispute. Despite it being a sizable business, the owners never got around to memorializing the termination terms within its shareholder’s agreement.  Hence, one of the reasons for the current litigation is to address its value. This business had grown organically over the years and by acquiring multiple competitors.  It is now at a size that there are enough comparable sales transactions to consider under the market approach. In reviewing these transactions, we noted components of the deals that needed to be considered to address their cash equivalent value. When reviewing the file, I thought of two adages learned in business school relating to the time value of money. The first, “a dollar today is worth more than a dollar tomorrow,” and the second, “a bird in the hand is worth two in the bush.” How does this concept relate to business valuation? When the value of a business utilizes the sales of comparable companies under the guideline merger and acquisition (M&A) method, it’s important to understand the cash-equivalent value of comparable transactions. Creative deal terms can make a deal more (or less) valuable than it may appear.  Some of these terms may include installment payments, earnout provisions, and contractual agreements such as employment/consulting contracts and/or covenants not to compete. The following discusses a few of these issues that may affect the selling prices found within these transactions. Installment Contracts In […]

A number of years ago I went on a short vacation to Ottawa, Canada. Between the hotel and the town center was what we New Yorker’s call a coffee shop or diner.  The storefront was brightly lit, clean, and had a menu the size of a small phone book.  FYI, I grew up in a similar family business, so it was no surprise to my wife that I was drawn to this familiar scene. As I often do, I excused myself from the table and walked around to inspect the restaurant while my breakfast was being prepared.  To my delight, the restaurant had an open kitchen and I was able to park myself in a corner and watch the kitchen staff dance with one another between the grill, sandwich board, and refrigeration units.  I was in heaven.  In case you are interested, I was a short-order cook, or what my Pop called a “griddle man”, way before business school. While returning to my table I observed a series of laminated colored pictures of the most common dishes ordered taped to the exhaust units. I quickly understood they were there so the kitchen staff would know exactly how the food should look.  My immediate reaction was, why didn’t I ever think of that?  What a good idea, especially if you had a number of shifts or stores and wanted everything to look the same.  Upon paying for our meal, I noticed a small sign, “Contact Us For Franchising Opportunities”.  It would […]

  A business is considered solvent when it is able to meet its long-term obligations. In determining same both the federal Bankruptcy Code and the Uniform Fraudulent Transfer Act look at the fair value of a debtor’s assets. Although this definition seems straightforward, both lawyers and accountants quickly learn the devil is in the details. Some companies may be legally solvent but nonetheless are unable to pay their debts because the fair value of their assets might include nonliquid assets. Independent analysis A company’s solvency may come into play in (a) fraudulent conveyances, (b) bankruptcy, and (c) due diligence actions. When questions arise about solvency, the parties often call on a business valuation expert to prepare a solvency opinion. A solvency opinion is an independent professional analysis that questions management’s assumptions and projections. Obtaining an accurate, authoritative solvency opinion is essential because transactions made during an insolvency period can be voided by a court. Experts consider several key issues to determine solvency: Does the company have positive equity (that is, do assets exceed liabilities)? Is the company able to pay off debts as they come due? Does the company possess adequate capital to operate? With these questions in mind, the expert then applies three tests to analyze solvency. Test #1 – Balance Sheet Test The first test determines whether, at the time of the transaction at issue, the debtor’s asset value exceeded its liability value. Assets are generally valued at fair market value, rather than at book value. The latter […]

Recently, while testifying to the fair market value of a closely-held business, the attorney began off-scrip and asked, “Mr. Gottlieb, what is valuation?” He didn’t ask me to explain the genesis of the fair market value standard or the premise of value used in my report.  He completely ignored the first set of questions we carefully planned. My initial response was, “excuse me”.  He repeated the question, “What is valuation?” Not to lose the attention of the Judge, I responded with confidence, “Valuation is the prophecy of the future”. With that, the usual and customary questions defining the general valuation theory and how one selects the most appropriate method for each instance quickly ensued.  We were back on track, following the script that has been written many times before. So, now that we are clear what valuation is, the next question – How is the future determined? – needs to be addressed. The income approach is often used to determine the initial indication of value.  Simply stated, the income or cash flow of the business that is expected to continue in perpetuity is utilized. In this week’s blog, we are providing our readers with a cram course comparing and contrasting the differences between the Discounted Cash Flow and Capitalization of Earnings Methods. The Discounted Cash Flow Method. The International Glossary of Business Valuation Terms defines discounted cash flow as “a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount […]

  The upcoming audit season will bring some new challenges for auditors testing of fair value measurements for financial reporting. Some recent changes due to the Tax Cut and Jobs Act of 2018 (“TCJA”) will create valuation issues: The reduction in corporate tax rates affected the value both publicly traded investments and privately held investments; Deductibility of interest expense is now limited; Bonus depreciation will further reduce taxes for both new and used equipment purchases; Carryback of Net Operating Losses is no longer allowed and limited to 80% of taxable income; The TCJA moves U.S. taxation to a territorial system. The tax benefits of electing S-Corp. status should be revisited, if used. If relevant to an investment held or to a company acquired, the above will require valuation models to be updated, particularly when valuation is based upon a discounted cash-flow method. Companies that do business with the People’s Republic of China are and will be greatly affected by the Tariffs instituted recently.  It is uncertain how much and how long is to be factored into valuation, but pricing should consider such events. Some other changes in accounting standards also may affect valuations. Starting in 2019 under ASU 2016-02 the accounting for leases will change. The new standard will require that Companies record a liability for operating leases, if the criteria of an “embedded lease” is met. Previously, such a valuation was unnecessary.  For acquisition accounting, such leases will require a valuation, when previously no liability was recorded. The changes […]

  It seems like a lifetime ago that I sat down at my desk with a pile of folders ready to attack “tax season”.  Perhaps it was.  It’s been almost 30 years since I moved to be “exclusive” with business valuation, forensic accounting and litigation support. Although I am no longer routinely prepare income tax returns, I still keep up with the tax code – for no other reason than to be fluent when asked to lecture at various legal conferences or provide expert testimony. So, in the season of giving, I thought I would provide some thoughts regarding a few selected tax issues you should consider before the end of the year. Year-end tax strategies for accrual-basis businesses The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2018 tax bills. The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2019. Doing so will enable you to deduct those expenses on your 2018 federal tax return. Common examples of such expenses include commissions, salaries and wages; payroll taxes; advertising; and interest. Also look into expenses such as utilities, insurance and property taxes. You can also accelerate deductions into 2018 without paying for the expenses in 2018 by charging them on a credit card. (This works for cash-basis taxpayers, too.) In addition, review all prepaid expense accounts […]

  When planning to merge with or acquire another company, a business owner needs to identify what’s actually being sold and estimate what those assets are really worth. Often the most valuable assets — such as goodwill, brand names, customer lists and patents — don’t appear on the balance sheet. A pre acquisition purchase price allocation helps an owner determine whether a purchase price is reasonable. In addition, how the purchase price is divvied up on the acquirer’s balance sheet has an impact on future earnings — thus affecting the transaction’s perceived success. Identify the assets Under Generally Accepted Accounting Principles (GAAP), companies that merge with or acquire another must allocate the purchase price among the assets and liabilities acquired according to Accounting Standards Codification (ASC) 805 (formerly covered by Statement of Financial Accounting Standards No. 141R). The first step in any purchase price allocation is to identify all tangible and intangible assets included in the deal. Examples of tangible assets are accounts receivable, equipment and inventory. To help categorize identifiable intangible assets, ASC 805 provides a framework based on whether the asset is related to: Marketing (trademarks, noncompete agreements, Internet domain names), Customers (customer lists, production backlogs), Artistic practice (copyrighted books, articles, photographs), Contracts (royalty agreements, franchises, leases, employment contracts), or Technology (patents, trade secrets, in-process research and development, computer software). The acquirer must estimate a useful life over which to amortize each intangible asset. But some intangible assets, such as brand names and in-process research and development, may […]