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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.

  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 […]


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  Last week we published the first of three installments of our Delaware Appraiser Series. We reviewed the fair value standard and some notable differences between the fair value standard used in the Delaware Chancery Court and fair market value defined in Revenue Ruling 59-60 of the Internal Revenue Code. There have been some recent developments in the Delaware Chancery Court providing further guidance on fair value. A number of these cases focus on the process used in “shopping” the subject company for sale; particularly when one side is seeking value in excess of an actual transaction. The Court has highly scrutinized or ignored the transactional value, depending on the sale process relied upon in their analysis. We leave the formal “briefing” to you, but we wanted to identify those cases that we think will be of interest. DELL INC V. MAGNETAR GLOBAL EVENT DRIVEN MASTER FUND LTD ET AL DECISION 12/14/17 https://courts.delaware.gov/Opinions/Download.aspx?id=266610 On appeal, the Delaware Chancery Court revised its opinion as to whether Silver Like Partners had perfected their appraisal rights. Silver Like Partners claimed Dell’s shares were worth more than the management buy-out price of $13.75 per share, a 37% premium to the Company’s ninety-day average unaffected stock price. The Court found that market pricings of Dell’s shares should not have been ignored and were relevant. In its original determination, the Court used a discounted cash flow method only, because the market was determined to be “inefficient.” A key finding in this appeal is summarized below: “The […]


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  According to a recent Delaware Division of Corporations Annual Report, more than 66% of the Fortune 500 companies are registered in the State of Delaware.  That being said, it is not surprising that the Delaware Chancery Court is widely recognized as one of the nation’s leading courts in settling shareholder appraisal disputes. Delaware affords protection to shareholders by granting appraisal rights within Delaware §262 where fair value is defined §262(h): After the Court determines the stockholders entitled to an appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. This definition can cause an appraiser to consider alternative methodologies and/or apply discounts and premiums differently than for different jurisdictions or for tax valuations. As you may be aware, Fair market value as defined by Revenue ruling 59-60 is:  “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 […]


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2018 Year End Tax Strategies

Posted in Divorce & Matrimony, on Dec 2018, By: Mark S. Gottlieb

  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 […]


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  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 […]


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If I had to do all over again I would have placed an empty pickle jar besides my desk and throw in a dollar every time a business owner proclaimed his/her business would be nothing without them.  At times, I feel the same way. But, my education and experience tells me otherwise.  That being said, if the business owner or another individual disproportionately accounts for the business’s success, it’s important to consider whether the risk of losing such a “key person” warrants an adjustment to the company’s value.   What’s a key person discount? A key person discount may be appropriate if a single owner or employee who would be difficult to replace is responsible for much of the company’s profitability and continued viability, especially when none of the company’s management team members are qualified to assume the key person’s responsibilities. The discount — usually a specific dollar amount or percentage — is taken to reflect the actual or potential departure of a key person. Instead of taking a separate, discrete discount at the entity level, some experts incorporate a key person discount into their valuation methodology. For example, under the income approach, a valuation expert might adjust the discount rate, capitalization rate or projected cash flows to reflect key person risks. Alternatively, an expert who uses the market approach might adjust the pricing multiples to reflect this risk. When are key person risks relevant? Owning a small business isn’t enough to justify a key person discount. These adjustments are […]


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What Attorneys Need To Know About Fraud

Posted in Forensic Accounting, on Sep 2018, By: Mark S. Gottlieb

Looking At The Fraud Triangle & Beyond Occupational fraud continues to wreak havoc on businesses, with annual business losses reported to exceed 5% of revenues.  Fraud experts have long suggested that the presence of three conditions, known as the “fraud triangle,” greatly increases the likelihood that an organization will be defrauded. The classic fraud triangle, as conceived by criminologist Donald Cressey, consists of Pressure, Rationalization and Opportunity.  The following provides a short description of each. Pressure A perpetrator experiences some type of pressure that motivates the fraud. Pressure can come from within the organization – for example, pressure to meet aggressive earnings or revenue growth targets. Alternatively, the pressure could be personal, such as the need to maintain a high standard of living or pay off debt from credit cards, medical bills or gambling. Rationalization Perpetrators often mentally justify their fraudulent conduct. They might tell themselves that they’ll pay back the money before anyone misses it, or reason that: They’re underpaid and deserve the stolen funds, Their employers can afford the financial loss, They’ll lose everything (or someone) if they don’t commit fraud, “Everybody” does it, or No other solution or help is available for their problems. Most employees who commit fraud are first-time offenders who don’t view themselves as criminals but as honest people caught up by circumstances beyond their control. By rationalizing, perpetrators overcome ethical barriers that generally guide their conduct. Opportunity Without opportunity, even motivated and rationalizing would-be perpetrators can’t commit fraud. Occupational thieves exploit perceived opportunities […]


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The Hunt For Hidden Cash and Unreported Income

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

  Discussing hidden cash and unreported income is always a popular topic for both commercial litigators and family law attorneys.  Currently, we are working on a number of business valuation engagements that have developed into “full blown” forensic accounting and fraud exercises.  Since these issues are currently on my mind, I thought a quick review of some of these issues and techniques would be of interest. Hunt For Hidden Cash Contrary to conventional thinking, forensic accountants don’t automaitclly assume that every closely-held business owner hides cash.  Arguably, some business are more susceptible than others. However, when red flags appear, further due diligence is often required. Experts (as well as IRS investigators) typically rely on certain forensic accounting techniques to prove that cash is missing and to estimate how much income the business owner isn’t reporting. These methods include: Bank deposits. This method involves reconstructing income. In this instance we analyze the spouse’s bank deposits, canceled checks and currency transactions, accounting for cash payments made from undeposited currency receipts, as well as nonincome sources of cash. Nonincome cash sources might be loans, gifts, inheritances or insurance proceeds. Source and funds application. Here, the business owner’s personal sources and uses of cash are analyzed. This approach can be effective in determining where the owner’s income and other funds came from, and how they eventually were used. If the owner is spending more money than he or she is taking in, the excess represents unreported income. Net worth. An unsubstantiated increase in a […]


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Beyond Financials: A look At Key Value Drivers

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

  Make no mistake about it: Analyzing and understanding the subject company’s financial statements is paramount when opining to 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. These other factors are commonly referred to as “key value drivers”. Key value drivers can range from a business’s culture, 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 that extends across several geographic regions or market sectors may add even greater value than one would expect.  This is not just a valuation expert speaking, but a sentiment shared by many sophisticated buyers. An industry by itself can also be a value driver – particularly if the sector is expanding rapidly. 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 acknowledges when a company distinguishes itself from the herd.  For example, does the subject company have a unique intellectual property or unusually efficient supply chain? Internal assets Favorable internal factors may also drive a company’s value. Although these factors […]


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  As the business valuation discipline matures, judges, attorneys and other people who rely on appraisal conclusions are becoming more comfortable with the income approach. But how does a business’s perceived risk translate into a reasonable discount rate? This is one of the most subjective — and contentious — aspects of valuing a business. Breaking down the income approach Under the income approach, value is a function of a company’s expected economic benefits and its risk relative to other investment types. Valuators typically gauge expected economic benefits in terms of net cash flow. They measure risk by the company’s cost of capital, which is the expected rate of return investors require to invest in the subject company. Riskier businesses have lower values as a result of lower projected income, higher discount rates — or a combination of these. The two most common methods that fall under the income approach are the capitalization of earnings and discounted cash flow methods. Discounting future cash flow The key to both of these methods is converting expected cash flows (or other economic benefits) to present value. This requires the valuator to use a discount rate that reflects the time value of money and the degree of risk associated with an investment in the business. Put another way, the discount rate reflects the risk associated with achieving the expected cash flows. When valuing a company’s equity, valuators may estimate expected cash flows to equity investors and use the cost of equity as the discount rate. […]


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