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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 Ongoing Battle Against COVID Relief Fraud

Posted in Forensic Accounting, on Jun 2024, By: Mark S. Gottlieb

A simple Google search for “PPP fraud” will bring you to hundreds of local news stories of recently indicted individuals and business owners alike defrauding the COVID-era Paycheck Protection Program. Nearly four years later, authorities have investigated 1,644 cases of tax and money laundering related to CARES Act fraud, with potential losses estimated at $8.9 billion. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 29, 2020, provided over $2 trillion in economic relief to help Americans navigate the financial challenges brought on by the COVID-19 pandemic. The CARES Act initially authorized up to $349 billion in forgivable loans to small businesses through the Paycheck Protection Program (PPP), with Congress later approving an additional $321 billion in PPP funding. In addition to the PPP, the CARES Act authorized various other relief programs, including the: Economic Injury Disaster Loan (EIDL) Economic Impact Payments (EIP) Provider Relief Fund (PRF) Pandemic Unemployment Assistance (PUA) Federal Pandemic Unemployment Compensation (FPUC) As the United States continues to grapple with the aftermath of the COVID-19 pandemic and its economic relief efforts, President Biden signed two bills into law that provide the Department of Justice and other federal agencies with more time to investigate and prosecute fraud charges related to these COVID-relief programs. These bills extend the statute of limitations for PPP and EIDL fraud charges to ten years. In the coming months, we may see the passing of the Fraud Prevention & Recovery Act, introduced by Senator Gary Peters (MI) in […]

Discussing hidden cash and unreported income is always a popular topic for both commercial litigators and family law attorneys. Currently, we are working on several engagements that have developed into full-fledged forensic accounting and fraud investigations. Experts (as well as IRS investigators) look at key areas to prove that cash is missing and to estimate how much income the business owner may not be reporting. Hidden cash can be discovered by taking a closer look at: Bank deposits: These can be used to reconstruct income by analyzing the parties’ bank deposits, canceled checks, and currency transactions, accounting for cash payments made from undeposited currency receipts and non-income cash sources, such as loans, gifts, inheritances, or insurance proceeds. Sources and use of funds: Here, the business owner’s personal sources and uses of cash are analyzed to determine where the owner’s income and other funds came from and how they were eventually used. If the owner is spending more money than they are taking in, the excess may represent unreported income. Net worth: An unsubstantiated increase in a business owner’s net worth can reveal unreported income. Telltale documents such as bank and brokerage statements, real estate records, and loan or credit card applications are often used to define this increase. The net worth gain is calculated, reported income is subtracted, and the amount is further adjusted to reflect any nondeductible expenditures and non-income sources of funds. Percentage markup: Net income is often estimated by applying a benchmark profit percentage to sales or […]

My first in-depth experience understanding non-compete agreements was in graduate school (many years ago). At that time, the examples only included transactions between large, publicly held companies, so when I handed my very first non-compete valuation to the attorney, I was shaking like a leaf in a hurricane. As the years went on, we’ve been asked to value such agreements more and more. I saw that non-compete agreements involving closely held businesses become “standard fare,” with 30 million Americans subject to this restrictive covenant. However, the landscape has dramatically changed with the Federal Trade Commission’s final rule issued on April 23, 2024, which bans most non-compete agreements. Under the new rule, existing non-competes are no longer enforceable, with narrow exceptions including senior executives earning over $151,164 annually in policy-making positions (less than 0.75% of workers). Employers are also prohibited from entering into any new non-competes, even with this small subset of executives. The final rule also includes a limited exception that hasn’t been as publicized: non-compete clauses are permitted in connection with the sale of a business entity, a person’s ownership interest in a business entity, or substantially all of a business entity’s operating assets. The final rule eliminates the proposed 25 percent ownership requirement for the seller. Prior to the FTC ban, non-compete agreements helped businesses retain valuable employees, safeguard inside information, and prevent unfair competition. When valuing a non-compete, we considered several factors, such as the overall business value, probable damages from a breach, likelihood of competition, and […]

When valuing a closely held, private company, it is important to recognize that the process may be more complex than valuing a publicly traded one. While valuation experts apply discounts at both the entity and shareholder levels, this blog will focus on exploring the various types of shareholder-level discounts and their impact on the valuation of closely held companies. Shareholder-level discounts are applied specifically to the value of an individual shareholder’s interest, accounting for the unique risks and limitations associated with owning a specific ownership interest. These discounts are used in the valuation process to arrive at a more accurate representation of the fair market value of a shareholder’s interest. Discount for Lack of Marketability (DLOM) Selling shares and liquidating funds is not as simple for a private company as for a publicly traded company. In a public company, shareholders can typically sell their shares on a stock exchange and receive the proceeds within a few days. However, this is not the case for closely held companies, where selling shares can be lengthy and complex due to the lack of a readily available market. The discount for lack of marketability is one of the most frequently applied discounts in valuing closely held companies. This discount reflects the difficulty of selling or liquidating ownership interests in a private company compared to a publicly traded one. The DLOM is used to account for the limited liquidity of closely held company shares and the potential difficulty in finding a buyer. Additionally, legal and […]

When valuing any business, one of the most important factors to consider is the overall market environment. After all, market conditions have an enormous influence on a company’s performance and what buyers are willing to pay. Privately owned businesses have more protection from immediate market fluctuations than publicly traded companies. But over the longer term, market forces always make their way into financial statements and operational health. In a strong, growing economy, valuations tend to be more generous when demand is high and access to capital is easy. Buyers have more confidence that a target business will continue thriving, allowing them to forecast future solid cash flows. This leads them to place higher multiples on a company’s earnings. Of course, the reverse is true in weaker, uncertain economies as well – buyers become more conservative in their projections, and valuations reflect that uncertainty. Market swings can impact industries and niches very differently, too. For example, a recession may completely deflate valuations of discretionary consumer businesses like gift shops when households pull back spending. As we saw during the result of the pandemic, demand for discount retailers and certain services may remain stable or even grow during downturns. Evaluating the market’s impact requires a nuanced, segment-by-segment analysis in addition to big-picture economic factors. An accurate business valuation must determine how the current market will likely affect future operations. As experts, we analyze historical performance, competitive forces, supplier costs, commodity prices, consumer demand, access to labor, and other external variables that impact […]

When representing a client with a business valuation report in hand, attorneys must look beyond the numbers at face value. Though you often leave the financial modeling and technical details to the valuation experts, a keen understanding of valuation inputs remains imperative for attorneys on either side of a transaction or dispute.  The capitalization rate (a.k.a. the “cap rate”) is among the most impactful business valuation inputs. This factor warrants particular scrutiny, as variations of even 0.5 percent can alter the valuations significantly. Properly vetting this input is essential to achieve an accurate valuation that stands up to legal scrutiny. To add another instrument to your toolbelt, we will provide a quick primer on the cap rate and its components. What is the Capitalization Rate? The capitalization rate is the rate of return used to convert a business’s annual earnings or cash flows into an initial company value, accounting for risk and growth prospects.  Computed as the difference between the discount and growth rates, the cap rate involves a nuanced evaluation of multiple factors. Attorneys should be familiar with these items to interpret their credibility quickly. Discount Rate The discount rate is the annual rate used to convert projected future cash flows into present value, reflecting the riskiness, time value of money, and required rate of return an investor would expect on the investment. The most common components used when computing the discount rate are: Risk-free rate of return Equity risk premium Size Premium, and Company-specific risk premium Generally, empirical […]

MSG Adds Three Members to Its Management Team

Posted in News, on Jan 2024, By: Mark S. Gottlieb

NEW YORK, NY – January 22, 2024 -This month, MSG has added three members to its management team, all of whom will be working from its Rockefeller Center headquarters.   Renil Thomas James: Manager – Valuation Analyst Renil James is a Certified Financial Analyst chartered by the CFA Institute. Prior to joining MSG, he led valuation teams at Economic Partners and Deloitte Touche. He has vast expertise in the valuation of business enterprises, intellectual property, intangible assets, goodwill impairment testing, & stock options. Lindsey Griffin: Director of Marketing & Client Relations Lindsey Griffin is a seasoned marketing professional. Prior to joining MSG, she was a marketing manager at a multi-disciplined marketing firm. Lindsey will direct the firm’s continued national reach to the legal community while developing and implementing the marketing strategy aligned with the firm’s goals. Reuben Gottlieb: Director of Forensic & Litigation Consulting Reuben Gottlieb is an attorney, certified public accountant, and has earned a master’s degree in forensic accounting. Prior to joining MSG, he has represented private equity firms, public companies, and their portfolio companies in cases involving failed mergers, fraud, and contractual disputes, including cases in the Delaware Chancery Court. _______________________________________________ Mark S. Gottlieb, CPA, PC (MSG) is distinguished as one of New York City and the Tri-State’s premier business valuation, forensic accounting, and litigation support firms. Our practice is devoted exclusively to providing attorneys and their clients with a diverse range of business valuation, forensic accounting, and litigation support services. With over thirty-three years of experience, […]

As a business valuation expert, I am often called in to assess the true value of a business that is the target of an acquisition. In many such deals, there’s an intricate dance between financial reality and manipulated appearances, which may present a glossier, more appealing image of a company’s financial health than what reality might reveal. In a recently reported case between two private equity firms, the acquirer alleged the seller employed multiple accounting gimmicks to inflate the earnings of a software company, Mobileum, prior to its $915 million sale. By prematurely booking revenues and masking expenses, they claim the target’s profits were artificially inflated by over $250 million. While the allegations remain in dispute, they underscore risks I regularly highlight to clients. As we evaluate the financials of an M&A target, here are some manipulative techniques that our team looks for. Premature Revenue Recognition Illegal yet common, this ploy involves recording future anticipated revenue as current-period income, inflating top-line figures before a sale. Sellers may book forward years of subscription revenue, excessive sales to partners, or less commonly, fictitious sales from shell companies to portray accelerated growth. Capitalizing Expenses This tactic converts regular operating expenses into long-term capital expenditures, enabling costs to be depreciated over years instead of impacting the income statement immediately. By reclassifying expenses as assets without proper documentation, companies reduce reported expenses, inflate reported assets, and subsequently increase profits and net worth. Channel Stuffing A risky tactic, channel stuffing involves shipping surplus products to distributors […]

Changes to Rule 702: An Expert’s Perspective

Posted in News, on Dec 2023, By: Mark S. Gottlieb

The admissibility of expert witness testimony serves as a cornerstone in modern legal proceedings, offering a lens through which complex, specialized knowledge can enlighten the trier of fact. As an expert witness for over 30 years, I have seen the standards for admissibility of expert testimony grow increasingly stringent over time. But who now bears the responsibility of ensuring an expert is fit to serve in that particular legal proceeding? The recent amendment to Rule 702 of the Federal Rules of Evidence, effective as of December 1, 2023, underscores a pivotal shift: elevating the burden of proof on the proponent of the expert witness and amplifying the role of judges in determining admissibility. See below for the amendment: Rule 702.  Testimony by expert witnesses. A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if the proponent has demonstrated by a preponderance of the evidence that: a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue b) the testimony is based on sufficient facts or data c) the testimony is the product of reliable principles and methods d) the expert has reliably applied the expert’s opinion reflects a reliable application of the principles and methods to the facts of the case This slight change in verbiage places a much clearer burden on the party offering the expert and makes […]

“I know nothing about GAAP and I’ll leave it to my accountants.” said Donald Trump Jr. in court yesterday, testifying in the ongoing civil case against former president Donald Trump. GAAP, according to the Financial Accounting Standards Board (FASB), stands for “Generally Accepted Accounting Principles.” GAAP represents a common set of accounting principles, standards, and procedures used in the United States for financial reporting. GAAP encompasses a wide range of rules and guidelines related to accounting, financial reporting, and disclosure. These principles guide how companies prepare their financial statements, including the balance sheet, income statement, and cash flow statement. In litigation cases involving financial fraud or misrepresentation, understanding GAAP requirements provide important context for building and arguing the case. Knowing where GAAP was violated or misapplied can reveal intent and liability. Current principles are based on a number of underlying assumptions. Although these points aren’t codified, they represent generalized assumptions and apply to most financial statements: Regularity – Transactions should be supported by verifiable documentation such as invoices or receipts, ensuring a robust audit trail. Consistency – Consistent accounting treatments and methods must be applied across reporting periods, with any unexplained changes warranting scrutiny. Sincerity – Financial reports must genuinely represent the company’s actual performance and position, avoiding biased estimates and subjective interpretations. Permanence – It is crucial to assume reasonable business continuity rather than liquidation, and any concerns about viability should be thoroughly investigated. Non-Compensation – Assets and liabilities should be treated independently, without offsetting against each other, except […]