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  This has certainly been an eventful week. My beloved New York Mets were sold. Although I believe Steve Cohen will be up to the task, I am somewhat resentful that my bid to purchase the Amazins was rejected. On the other side of the plate, Joe Biden can claim victory in the turbulent presidential election. Despite the possible legal battle, it appears that the Biden-Harris battery is now warming up for a January 2021 inauguration. President-elect Biden has made no secret of his intent to raise $3.5 trillion in taxes over the next ten years. The intended contributors will be corporations and individuals earning over $400,000 per year. Conversely, lower-income taxpayers may benefit from tax-cutting incentives from items such as refundable credits, etc. Biden’s ability to effectuate any tax change heavily depends upon the Democrats’ ability to win both the House and Senate. The Democrats currently hold a majority in the House of Representatives but are taking swings at the two remaining Senate seats up for grabs. If the Democrats sweep both available seats and get a 50/50 split in the Senate, then the Biden tax reform vision could theoretically be passed without a single Republican defector. Pending a home-field advantage, the Biden tax reform could pass via a Budget Reconciliation which will not require 60 votes for passage. Alternatively, they will only need a majority of 51 votes. Assuming everyone votes along the party line, Vice President-elect Kamala Harris will cast the deciding vote. Without the benefit of […]

  The news cycle is currently inundated by the testimony of medical professionals of various backgrounds and experience, and as we have seen, their opinions and advice can starkly differ. While many have advocated for social distancing and the use of masks, others have sought to cast doubt on the productivity of these measures, claiming either that they are unnecessary or that they have no impact on the virus’s transmissibility. Recently, lawyers for the CT Freedom Alliance offered two medical expert witnesses that were subsequently rejected on the basis that neither was sufficiently qualified to serve as an expert. In response to one individual’s previous attestations that viruses are nonexistent and vaccines poisonous, Judge Thomas G. Moukawsher expressed his clear inclination that established scientific evidence should not be disputed. This is an extreme example but one that bears mentioning. Judges are frequently confronted with radically opposing partisan expert opinions. Irrespective of their familiarity with the subject at hand, they must decide as to which opinion is most correct. With regards to COVID-19 and the preventative measures thereof, there are a sufficient number of credible and widely circulated opinions as to make the credibility (or lack thereof) of witnesses such as those described above relatively obvious. But what of matters that concern subjects that aren’t so broadly known? Let us take for example the industry accepted principles and standards in business valuation. In a matrimonial, shareholder, or estate dispute, it is often that both parties hire a business valuation expert. Occasionally, […]

  For those of you familiar with our valuation and forensic reports, you know first-hand that we use various tools to analyze and illustrate the financial capacity of a subject company. To examine financial characteristics, we often compare the subjects’ financial ratios to their peer group. For example, the subject company may report travel and entertainment expenses as 5.0% of annual sales. If the subject company reports T&E at 15.0% of sales, further investigation may indicate that this category contains excess owners’ perquisites. To illustrate these and other financial trends, we use charts and other demonstratives. One of my favorite analytical tools is a SWOT analysis. SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses generally refer to: • Financial resources (funding, sources of income, and investment opportunities) • Physical resources (location, facilities, and equipment) • Human resources (employees, volunteers, and target audiences) • Access to natural resources, trademarks, patents, and copyrights, and • Current processes (employee programs, department hierarchies, and software systems) While opportunities and threats consider: • Market trends (new products, technology advancements, and shifts in audience needs) • Economic trends (local, national, and international financial trends) • Funding (donations, legislature, and other sources) • Demographics • Relationships with suppliers and partners • Political, environmental, and economic regulation We commonly illustrate the SWOT analysis in chart form, which draws the reader’s attention to those areas of greatest significance. Another tool we frequently use is Michael Porter’s Five Forces theory. For those of […]

  Despite the recent partial rebound of the stock market, the economic realities developed in the second quarter of 2020 is having a devastating effect on the economy.  Unemployment is at an alarming rate, several prominent businesses have declared bankruptcy, and many businesses, small and large, are debating their future.  That being said, this new reality may provide estate planning opportunities to reduce gift and estate taxes.  In this blog, I’d like to discuss the valuation of promissory notes and how their valuation may be affected during times of economic hardship. Promissory notes are commonly used to transfer assets between family members.  Sometimes these notes are part of a gifting program; other times, it may be an asset of an estate.  In either instance, the note needs to be valued. Standard of Value The standard of value in gift and estate matters is fair market value. Fair market value is defined in Revenue Ruling 59-60 [2.2 Section 20.20231-1(b) of the Estate Tax Regulations (Section 81.10 of the Estate Tax Regulations 105) and Section 25.2512-1 of the Gift Tax Regulations (Section 86.19 of Gift Tax Regulations 108)] as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” The fair market value standard assumes that the price is transacted in cash or cash equivalents. Court decisions […]

  The NBA & NHL have suspended play. MLB has postponed the start of its season. Public & private schools around the country are closing. Locally, the NYC St. Patricks’ Day parade and other large public gatherings are canceled, amongst the rumors surrounding that the city will order a mandatory quarantine. These are just a few of the headlines we have heard and read this week in response to the current coronavirus pandemic. The health of our family, friends, and neighbors is paramount at this time. Still, as the stock market seems to be in freefall, one can only wonder what impact the coronavirus will have on the short-term and long-term valuation of closely-held businesses. The micro and macroeconomic communities have experienced this turmoil before. Of course, there was 911 and the financial crisis of 2008, but when was the last time the spokes on the economic wheel have slowed down or stopped because people were either too sick to work or discouraged from going to work?  Yes, many of us will be able to work from home; but let’s be honest – it will not be the same. Local restaurants and attractions expect to see a drastic decrease in business; the travel and hospitality business is flooded with cancellations, despite offering services at unheard-of low prices. (Someone told me you could fly to Florida this weekend for $50.) If you are one of our frequent readers, you are familiar with the three general methods of valuation, the asset, market, […]

  Are loans due to or due from shareholders a bona fide debt obligation, a form of equity capital, or a hybrid of the two? This distinction is relevant when valuing a business – particularly in a shareholder dispute or in a divorce case. I customarily devote a good portion of class time discussing this issue in my class at Fordham Law School. This distinction may cause a material difference in the ultimate valuation of a closely-held business or even the income attributed to its owner. Often, experts turn to the Internal Revenue Service for objective guidance on this issue. What Would The IRS Say? Owners occasionally borrow funds from their businesses, say, to pay a child’s college costs or provide a down payment on a vacation home. These loans to shareholders appear on a company’s balance sheet as a receivable. For loans of more than $10,000, the IRS requires taxpayers to treat the transaction as a bona fide debt. Then the company must charge the shareholder an “adequate” rate of interest. Each month the IRS publishes its applicable federal rates (AFRs), which vary depending on the term of the loan. If the company doesn’t charge interest or follow a complicated set of below-market interest rules to impute interest on the loan, the IRS may claim the shareholder received a taxable dividend or compensation payment rather than a loan. The company may deduct the latter, but it will also be subject to payroll taxes. However, both dividends and additional compensation […]

  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 memorialize 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 to the deals that needed to be considered to address its 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 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.  We stayed at the Fairmont Hotel, which is known for its elegance and convenient locale. 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 […]

  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 […]

  We are presently working of several assignments concerning dissenting shareholder disputes.  Attorneys that represent clients in such matters can attest that there are many challenges unique to these cases.  One of them, and perhaps the most prominent, relates to the value of the business subject to the dispute.  Within this broad context, attorneys need to be familiar with a number of valuation issues affecting their case.  These often include a familiarity of the standard of value, the valuation date, and valuation method to be employed. This week’s blog briefly discusses these issues. Hopefully, it will set you in the right direction. Standard Of Value The standard of value for dissenting shareholder cases in most states is fair value, although the term is subject to different statutory and judicial interpretations. Generally, fair value is defined as the value of the plaintiff’s shares immediately before the corporate action that the shareholder objected to. Fair value typically excludes any appreciation or depreciation related to the corporate action unless exclusion would be inequitable. This definition may not necessarily be synonymous with the “fair market value” standard of value. For instance, the dissenting shareholder is not usually a willing participant in the transaction; nor is the transaction consummated on an objective, unbiased basis. Also, fair value usually doesn’t always include discounts for lack of control and marketability. Some jurisdictions may recognize one of these discounts — or leave the application of these discounts to the court’s discretion based on the case’s facts and circumstances. […]