Category: Shareholder Disputes

We have distilled decades of experience at the intersection of law, business and finance into a suite of articles to help our clients make sense of business valuation, forensic accounting, and litigation support. Please visit our site regularly for our latest content.

Challenges In Valuing Family Owned Businesses

Posted in Business Valuation, on Jan 2018, By: Mark S. Gottlieb

  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 […]

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The reality show, “Jersey Shore,” may not interest legal professionals, yet the case of its star, Mike Sorrentino—AKA “The Situation”—may be. Among his tax fraud charges, he was accused of false documenting his imputed income through one of his companies. If you’re involved in tax fraud litigation, matrimonial actions, and shareholder or partnership disputes, advice about imputed income and its calculations is crucial. The IRS defines imputed income as the value of any benefits or services provided to an employee. The value of this cash or non-cash compensation must be considered in order to accurately reflect an individual’s taxable income. Employees can have income tax withheld for their imputed income or pay the amount due with their tax installment payments. Examples of imputed income are: Dependent care assistance exceeding the tax-free amount, Health and dental insurance for non-dependent domestic partners or same-sex partners or spouses, Basic or group life insurance in excess of $50,000, Personal use of company or employer-provided car, Non-deductible moving expense reimbursements, Educational assistance exceeding the excluded amount, and Below market rate loans. There are three approaches in determining imputed income: Detailed Transaction Listing and Analysis, Proof of luxury spending inappropriate for the claimed income, and The Net Worth Method. A Detailed Transaction Listing and Analysis consists of a listing of everything a person spends. A thorough analysis of these lists can be approached in two different ways: Adding up all the deposits to calculate after-tax earnings, and then comparing this total to the claimed earnings. List […]

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Defining Fair Value In Shareholder Disputes

Posted in Shareholder Disputes, on Mar 2010, By: Mark S. Gottlieb

This week, I sat down with Peter Mahler, a corporate attorney at Farrell Fritz, who is widely known as an authority on corporate dissolution and valuation proceedings involving closely-held businesses (which he blogs about over on New York Business Divorce Blog).   First, we discussed how there are times when the accounting and legal professions meet and form a synergy that complements one another. But there are also times when terms and definitions must be distinguished and defined based upon facts and circumstances. The concept of “Fair Value” is one of those terms. A federal Appeals Court once remarked that “the valuation of a closely held company is an inexact science, some might say an art.” The Model Business Corporation Act in 1984 created the right of a shareholder to dissent from corporate decisions and obtain payment of the value of his or her shares. The shareholder is entitled to receive the “fair value” of his or her shares in case of dissent. But the simplicity of the term “fair value” is misleading, as there are many questions to be answered and important factors to be considered in order to reach such “fair value.” Minority shareholders have been granted a number of rights to protect their position inside a corporation and advance their interests. One of these rights is the appraisal right–the right to dissent and obtain payment of fair value of their shares. Fair value can be defined in a number of ways and each definition may be correct. […]

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