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Monthly Archives: March 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.

  I was recently retained to prepare a valuation report for a shareholder dispute. Our office prepared a draft report utilizing the fair value standard, which is the standard to be used in New York State for such cases. Counsel invited both experts to a meeting hoping to settle the case without the need of costly litigation. The opposing expert came armed with a plethora of schedules and worksheets computing the minority shareholders interest – but to the surprise to all, the experts opinion was developed under the fair market value standard. The terms “fair value” and “fair market value” are sometimes used interchangeably. To a business valuation professional, however, they have very different meanings. Adding to the confusion, “fair value” may be statutorily defined for shareholder litigation (NYS) and divorce purposes (NJ) – and that definition may vary depending on the case’s venue. Moreover, fair value means something entirely different when it’s used for financial reporting purposes. (See “Fair value under GAAP.”) Ultimately, an expert’s conclusion can differ significantly, depending on which standard of value is appropriate. Fair market value Fair market value is probably the most widely recognized valuation standard. It’s commonly used to value businesses or business interests for sale and tax purposes. The IRS defines fair market value in Revenue Ruling 59-60 as “[T]he 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 […]

  Information presented on a company’s financial statements may not always be meaningful from a valuation perspective – even if it follows U.S. Generally Accepted Accounting Principles (GAAP). Whether financial information is obtained from business income tax returns or audited financial records, valuation experts often make adjustments to get a clearer picture of a company’s financial position, market risk and ability to generate cash flow in the future. In some instances these adjustments may be due to some nefarious actions of the business owner.  In other instances they may just be due to elections in accounting methodology or procedures.uing a business interest. Although these adjustments vary from case to case, many of them fall into one or more of the following types when valuing a business interest. Nonstandard accounting practices, Extraordinary or nonrecurring items, Hidden assets or liabilities, and/or Discretionary spending. The following is a condensed review of these common adjustments. 1. Nonstandard accounting practices A valuation expert may estimate value by using pricing multiples derived from comparable private and public transactions (under the market approach) and discount rates derived from returns on public company stocks (under the income approach). Thus, if the subject company deviates from how other companies in its industry typically report transactions, the valuator may need to make adjustments. Certain financial reporting practices may require adjustment, if the subject company’s methods differ from industry norms. Examples include differences in inventory, depreciation or revenue recognition methods. For example, if a company uses the last-in, first-out method (LIFO) […]

You have just picked up a new case. Your client is a partner in a small or medium sized professional practice.  Maybe it’s a medical practice, an accounting office or even a law firm. You were hired to serve as counsel in a shareholder dispute or even a divorce?  It really doesn’t matter. What does matter is that your clients’ equity interest needs to be valued. After a long afternoon with your client you realize there are a number of issues that may derail a quick resolution to this dispute.  Even now, you may have more questions than answers.  Setting aside those concerns specific to your clients’ practice and profession – there are a few issues you need to consider. What is the appropriate standard of value to be used? What is the appropriate date of the valuation? and How is goodwill to be determine? (if at all) These issues are important to establish your client’s equity interest value, as well as other issues that may be germane.  For instance in a matrimonial setting spousal and child support needs to be determined.  In a shareholder/partner dispute income distributions and loans may need to be analyzed. The following provides a short discussion of same. 1. Standard of value The use of an incorrect standard (of value) can render a valuation report and the related testimony inadmissible. Fair market value and fair value are among the most common standards, but some jurisdictions now call for “intrinsic value.” Fair market value as defined […]