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You have just picked up a new case. Your client is a partner in a small or medium sized professional practice.  Maybe it’s a medical practice, an accounting office or even a law firm. You were hired to serve as counsel in a shareholder dispute or even a divorce?  It really doesn’t matter. What does matter is that your clients’ equity interest needs to be valued. After a long afternoon with your client you realize there are a number of issues that may derail a quick resolution to this dispute.  Even now, you may have more questions than answers.  Setting aside those concerns specific to your clients’ practice and profession – there are a few issues you need to consider. What is the appropriate standard of value to be used? What is the appropriate date of the valuation? and How is goodwill to be determine? (if at all) These issues are important to establish your client’s equity interest value, as well as other issues that may be germane.  For instance in a matrimonial setting spousal and child support needs to be determined.  In a shareholder/partner dispute income distributions and loans may need to be analyzed. The following provides a short discussion of same. 1. Standard of value The use of an incorrect standard (of value) can render a valuation report and the related testimony inadmissible. Fair market value and fair value are among the most common standards, but some jurisdictions now call for “intrinsic value.” Fair market value as defined […]

Shareholders with the forethought to sign buy-sell agreements help facilitate voluntary and involuntary transfers between shareholders. But when it’s time for a buyout, many shareholders discover that their agreements don’t cover all of the necessary details. Here are four key terms to consider when drafting or reviewing a buy-sell agreement. 1. Definitions One of the leading causes of disputes in shareholder buyouts is failure to provide valuation guidelines and define key terms. For example, buy-sell agreements often state that the buyout price is the value of an interest in the business. But “value” can mean different things in different contexts, so the agreement needs to spell out whether the price should be based on fair market value, fair value, investment value or some other standard of value. Moreover, every valuation is effective “as of” a certain point in time, and the valuation date can have a big impact on the result. The agreement should specify whether the date used is the date of the triggering event, the last day of the company’s most recent fiscal year or some other date. Using a specific date rather than the date of the triggering event discourages owners from timing their departures to maximize the buyout price. 2. Discounts & Premiums Even if a buy-sell agreement specifies a standard of value, the level of value – which can range from a controlling interest to a nonmarketable, minority interest – can have an enormous impact on the outcome. Parties to buy-sell agreements often assume that […]

The business valuation and forensic accounting disciplines often intersect when valuing a business for divorce or shareholder dispute. Controlling shareholders may try to hide assets or downplay cash flow to minimize buyouts of their spouses or minority shareholders. As valuation experts we know how to approach these situations to unearth and adjust for the common and uncommon financial misstatements.   Look Beyond The Financials Financial statements and tax returns are often the first source of information to analyze when valuing a business. But it’s also important to look for public sources of information, as well as to conduct site visits and management interviews. These steps can be especially important in adversarial situations to ensure that controlling shareholders (1) aren’t hiding assets, (2) underreporting income, or (3) overstating liabilities and expenses. Nowadays, a simple internet and/or social media search can help reveal financial misstatement. In a more traditional sense, a review of the detailed accounting general ledgers can provide valuable information.  In a recent shareholder dispute between two brothers we uncovered a fictitious foreign entity.  In this instance, payments to this entity were used by one brother to divert profits and funds from the other.  But for our analysis and inquiry to explain a sudden decrease in gross profit margins, this diversion many never had been discovered. Aside from the traditional financial review, there are three things you, the litigation attorney, should consider: Get your financial expert involved early on. Pay attention to warning signs. Don’t be hesitant to expand the […]

Many of you may know that I am an Adjunct Professor at Fordham Law School.  This past weeks lecture included a discussion of normalization adjustments to be considered when utilizing the income approach in a business valuation.  As I was presenting my talking points I remembered a lecturer I gave for the Internal Revenue Service many years ago.  During that lecture on tax issues concerning closely-held businesses, I proudly stated that I could show business owners how to avoid (not evade) corporate income taxes by modifying shareholder-employee compensation before year-end.  As you can imagine, my remarks were not warmly greeted by the IRS representatives in the audience. The IRS and closely-held business owners often disagree about the reasonableness of shareholder-employee compensation.  This disagreement is found in both income tax and business valuation instances. For income tax purposes, business owners usually prefer to classify payments as tax-deductible wages because it lowers its federal taxable income and corporate taxes. But, if the IRS believes that an owner’s compensation is excessive, it may claim that payments are disguised dividends, which aren’t tax deductible. The determination and application of reasonable shareholder-employee compensation is also often a contested issue in business valuation.  When shareholder-employee’s compensation is overstated, the available cash flow is often lower and the indicated value (under the income approach) is less.  For this and other reasons, the determination of officer compensation is often a contested adjustment. Whether this conflict is between the taxing authority or an opposing valuation expert, the case law […]

  Splitting up a marital estate can be a long and complicated process, particularly if one of the assets includes a privately owned business. Fortunately, a valuation analyst can assist attorneys and their clients address these issues – even at the early stages of the matrimonial action. These preliminary issues often include, but may not be limited to: How much is the business actually worth? Do you need to be concerned about the issue of “double dipping” when considering the valuation of a business and the money spouses support obligations? Is the spouse that owns and operates the business deceptive when it comes to reporting his/her income? In this blog post we quickly discuss these three issues.  For those of us that travel down this road often – you know that the totality of the financial concerns in a matrimonial matter can be significant. How much is the business actually worth? There are three methods used to value a business: the asset, market and income approaches. All of these techniques start with the analysis of the company’s financial statements. But discovery shouldn’t stop there, especially for spouses who aren’t involved in day-to-day business operations. Valuation experts should be given equal access to financial records and opportunities to tour the company’s facilities and interview management. Inadequate discovery can cause an expert to miss critical information and possibly lead to an inaccurate conclusion of value. If the business interest was owned prior the marriage, it might be appropriate to include only the […]

  Family-owned businesses aren’t usually run like large public companies. From the Rockefellers to the Kardashians, working together can bring out the best – and worst – in families. Here are four key issues to consider when valuing these entities. 1- Are family members on the payroll? The terms “family business” and “nepotism” often go hand in hand. Although some business owners hire family members because they’re perceived as more trustworthy, many hire them out of obligation or to satisfy a desire to pass the business on to their offspring. When valuing family-owned entities, business appraisers objectively consider whether family members are qualified for their positions and whether their compensation is reasonable. In some cases, management of a hypothetical buyer might want to consolidate family members’ positions and use fewer people to perform their duties. As a result, valuation professionals often make an upward adjustment to cash flow to reflect the excess expense of employing relatives. But the reverse may also be true. Some family businesses overwork or underpay related parties. Consider, for example, business owners whose passion for their work and desire to succeed lead them to work exceptionally long hours. When evaluating a related party’s compensation, experts look beyond the family member’s base pay. For example, they must also adjust for payroll taxes, benefits and extraneous perks. Perks may include such things as allowances for luxury vehicles, country club memberships or loans at below-market interest rates. 2 – Are there other related-party transactions? Family-owned businesses may engage in […]

I know that 2018 has begun with frigid temperatures for those of us in the Northeast, but I want you to get up from your desk, open up your office window and listen to what’s happening outside. That galloping sound you hear isn’t construction work, it isn’t local traffic, or planes flying above. It is the masses of divorcing couples, business owners, and retirement minded individuals running to their matrimonial, estate and corporate attorneys. On December 22, 2017 Congress passed and President Trump signed into law The Tax Cuts and Jobs Act (hereafter, “the Act”). The Act is the most significant change to the current tax law in three decades. In its most simplistic terms the Act (1) lowers individual and corporate tax rates, (2) eliminates multiple tax credits and deductions, (3) increases the child tax credit, and (4) repeals the healthcare individual mandate penalty. Matrimonial and Family Law Attorneys should be aware that for those that separate and/or divorce after December 31, 2018 alimony payments will no longer be taxable to the recipient or deductible by the payer. Gift and Estate Attorneys should note that the estate and gift tax exclusion amounts have doubled after December 31, 2017 and before January 1, 2026. Corporate Attorneys should know that the corporate income tax rate has been simplified to a flat 21 percent and that owners of pass-through entities will be taxed at a 20 percent income reduction calculation. So the question you may be asking is: Why is a boutique […]

Unless you were buried alive during this week’s snowstorm, you probably heard that Donald Trump’s 2005 individual income tax return has been disclosed.  To date, no one has taken responsibility for its discovery, except for the journalist who found it on his doorstep.  Many of the talking heads and late night comedians have discussed and joked about the return, or more accurately its first two pages.  Few, if any, have discussed what the return partially states or even means in regards to President Trump’s reported income and/or assets.   Granted, this information is incomplete and may pose more questions than answers.  However, this exercise is not uncommon for a forensic accountant engaged in analyzing an individual income tax return in a business dispute or matrimonial action.  This discussion is non-partisan.  Truthfully, the subject matter could be about anyone.  But you are reading this blog post because it applies to the current President of the United States. Let this be a primer for those of you that are commercial or family law litigators. Form 1040 is the long form federal individual income tax return filed annually by individuals. You can obtain a full copy of this (blank) form and its instructions here. This particular filing is for the year 2005, which is 12 years prior to Mr. Trump becoming President.  It is fair to say that if President Trump voluntarily submitted his returns for public review, he probably would not have provided a return filed so many years ago. Here is […]

Introduction MarketWatch recently published an article outlining a report written by the global wealth consultancy, Wealth-X, and the insurance brokerage and consulting firm, NFP, which predicts that ultra-high-net-worth individuals will transfer $3.9 trillion to the next generation by 2026.The article writes that this massive global transfer, which it describes as the largest wealth transfer in history, has already begun. It states that, as of last year, ultrahigh-net-worth individuals 80 years of age or older are, on average, seven times wealthier than those 30 years of age or younger. These older, extremely deep-pocketed individuals are now in a position to transfer wealth to their family members. As the article writes, a recent survey conducted by Knight Frank found that the biggest concerns for these individuals are “succession and inheritance issues,” which likely derive in part from the complicated regulations imposed by the Internal Revenue Service. These concerns were likely amplified in the beginning of August 2016 by the official IRS release of the proposed changes to Internal Revenue Code § 2704, which handles rules for valuation discounts that affect transfers of family-owned equity interests or partnerships. The recently proposed changes to Internal Revenue Code § 2704 would affect not only the superrich, but anyone planning to transfer an interest in a family-owned corporation or partnership to a family member. These regulations would eliminate valuation discounts for transfer interests and likely limit the financial benefit of these transfers. The best strategy for an individual planning to transfer interests in a family business […]

Recently, Bloomberg reported that Fiat Chrysler Automobiles is under investigation for potential securities fraud after being accused of inflating U.S. car sales. The company is said to have coordinated a scheme in which individual dealers were paid to create false sales reports, thereby exaggerating financial performance and deceiving investors. Unfortunately, instances of fraudulent financial reporting such as this one have become somewhat commonplace among corporations under pressure to meet earning expectations or to conceal declining financial performance. Fraudulent financial reporting is any intentional misstatement of, or omission from, the financial statements of a company with the purpose of misleading the statement users. The complexity of financial statement fraud has garnered significant attention over the past decade.  It has become clear that there are a variety of subtle methods used to manipulate expenses and revenues that are not easy to detect without knowledge of the necessary analytical tools. In 2002, following a series of major corporate financial fraud scandals, Congress passed the Sarbanes-Oxley Act which enacted strict reforms to financial reporting standards in the hopes of protecting investors from potential fraudulent accounting activities. In spite of these new standards, the number of fraud cases, as well as the dollar value of false financial reporting’s, has continued to rise for the past 14 years. Most cases of financial statement fraud take the form of either improper revenue recognition, misstatement of assets, liabilities or expenses. It is nearly impossible to trace the source of every revenue stream, verify the existence of all reported […]