Blog

Monthly Archives: February 2018

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.

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 […]


Full Read

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 […]


Full Read

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 […]


Full Read