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Yearly Archives: 2019

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.

  Our firm was recently retained to determine the fair value of a minority interest in a business for a shareholder dispute. Despite it being a sizable business, the owners never got around to memorialize the termination terms within its shareholder’s agreement.  Hence, one of the reasons for the current litigation is to address its value. This business had grown organically over the years and by acquiring multiple competitors.  It is now at a size that there are enough comparable sales transactions to consider under the market approach. In reviewing these transactions, we noted components to the deals that needed to be considered to address its cash equivalent value. When reviewing the file, I thought of two adages learned in business school relating to the time value of money. The first, “a dollar today is worth more than a dollar tomorrow” and second, “a bird in the hand is worth two in the bush”. How does this concept relate to business valuation? When the value of a business utilizes the sales of comparable companies under the guideline merger and acquisition (M&A) method, it’s important to understand the cash-equivalent value of comparable transactions. Creative deal terms can make a deal more (or less) valuable than it may appear.  Some of these terms may include installment payments, earnout provisions, and contractual agreements such as employment/consulting contracts and/or covenants not to compete. The following discusses a few of these issues that may affect the selling prices found within these transactions. Installment Contracts In […]


What To Consider When Valuing Franchises

Posted in Business Valuation, on May 2019, By: Mark S. Gottlieb

  A number of years ago I went on a short vacation to Ottawa, Canada.  We stayed at the Fairmont Hotel, which is known for its elegance and convenient locale. Between the hotel and the town center was what we New Yorker’s call a coffee shop or diner.  The storefront was brightly lit, clean, and had a menu the size of a small phone book.  FYI, I grew up in a similar family business, so it was no surprise to my wife that I was drawn to this familiar scene.  As I often do, I excused myself from the table and walked around to inspect the restaurant while my breakfast was being prepared.  To my delight, the restaurant had an open kitchen and I was able to park myself in a corner and watch the kitchen staff dance with one another between the grill, sandwich board, and refrigeration units.  I was in heaven.  In case you are interested, I was a short-order cook, or what my Pop called a “griddle man”, way before business school. While returning to my table I observed a series of laminated colored pictures of the most common dishes ordered taped to the exhaust units. I quickly understood they were there so the kitchen staff would know exactly how the food should look.  My immediate reaction was, why didn’t I ever think of that?  What a good idea, especially if you had a number of shifts or stores and wanted everything to look the same.  Upon […]


  A business is considered solvent when it is able to meet its long-term obligations. In determining same both the federal Bankruptcy Code and the Uniform Fraudulent Transfer Act look at the fair value of a debtor’s assets. Although this definition seems straightforward, both lawyers and accountants quickly learn the devil is in the details. Some companies may be legally solvent but nonetheless are unable to pay their debts because the fair value of their assets might include nonliquid assets. Independent analysis A company’s solvency may come into play in (a) fraudulent conveyances, (b) bankruptcy, and (c) due diligence actions. When questions arise about solvency, the parties often call on a business valuation expert to prepare a solvency opinion. A solvency opinion is an independent professional analysis that questions management’s assumptions and projections. Obtaining an accurate, authoritative solvency opinion is essential because transactions made during an insolvency period can be voided by a court. Experts consider several key issues to determine solvency: Does the company have positive equity (that is, do assets exceed liabilities)? Is the company able to pay off debts as they come due? Does the company possess adequate capital to operate? With these questions in mind, the expert then applies three tests to analyze solvency. Test #1 – Balance Sheet Test The first test determines whether, at the time of the transaction at issue, the debtor’s asset value exceeded its liability value. Assets are generally valued at fair market value, rather than at book value. The latter […]


  We are presently working of several assignments concerning dissenting shareholder disputes.  Attorneys that represent clients in such matters can attest that there are many challenges unique to these cases.  One of them, and perhaps the most prominent, relates to the value of the business subject to the dispute.  Within this broad context, attorneys need to be familiar with a number of valuation issues affecting their case.  These often include a familiarity of the standard of value, the valuation date, and valuation method to be employed. This week’s blog briefly discusses these issues. Hopefully, it will set you in the right direction. Standard Of Value The standard of value for dissenting shareholder cases in most states is fair value, although the term is subject to different statutory and judicial interpretations. Generally, fair value is defined as the value of the plaintiff’s shares immediately before the corporate action that the shareholder objected to. Fair value typically excludes any appreciation or depreciation related to the corporate action unless exclusion would be inequitable. This definition may not necessarily be synonymous with the “fair market value” standard of value. For instance, the dissenting shareholder is not usually a willing participant in the transaction; nor is the transaction consummated on an objective, unbiased basis. Also, fair value usually doesn’t always include discounts for lack of control and marketability. Some jurisdictions may recognize one of these discounts — or leave the application of these discounts to the court’s discretion based on the case’s facts and circumstances. […]


Recently, while testifying to the fair market value of a closely-held business, the attorney began off-scrip and asked, “Mr. Gottlieb, what is valuation?” He didn’t ask me to explain the genesis of the fair market value standard or the premise of value used in my report.  He completely ignored the first set of questions we carefully planned. My initial response was, “excuse me”.  He repeated the question, “What is valuation?” Not to lose the attention of the Judge, I responded with confidence, “Valuation is the prophecy of the future”. With that, the usual and customary questions defining the general valuation theory and how one selects the most appropriate method for each instance quickly ensued.  We were back on track, following the script that has been written many times before. So, now that we are clear what valuation is, the next question – How is the future determined? – needs to be addressed. The income approach is often used to determine the initial indication of value.  Simply stated, the income or cash flow of the business that is expected to continue in perpetuity is utilized. In this week’s blog, we are providing our readers with a cram course comparing and contrasting the differences between the Discounted Cash Flow and Capitalization of Earnings Methods. The Discounted Cash Flow Method. The International Glossary of Business Valuation Terms defines discounted cash flow as “a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount […]


  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 […]


  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 […]