Yesterday, New York Supreme Court judge Arthur Engoron ruled in the ongoing lawsuit alleging former President Donald Trump and his businesses provided false financial statements to obtain loans and other benefits. This case piqued my interest as a credentialed business valuation expert, forensic accountant, and expert witness. Yesterday’s decision was over thirty pages long, and I wanted to break down the extent of the document for those following these ongoing legal battles. The New York Attorney General’s office had brought claims against President Trump, his family members, and corporate entities under a statute prohibiting persistent fraudulent conduct in business. The AG submitted evidence that President Trump inflated the valuations of his assets on financial statements from 2011 to 2021. For instance, President Trump claimed his apartment in Trump Tower was 30,000 square feet, later learned to be about three times its actual size. This overstatement led to an overvaluation of over $100 million! The Court also found evidence that other Trump assets, such as branding premiums, shared the same misstatement. President Trump’s legal team asked the Court to dismiss the entire case, arguing the financial statements contained disclaimers and that determining value is subjective. Those requests were later denied. The Court ruled yesterday that the Attorney General provided sufficient evidence that President Trump knowingly submitted false financial statements over multiple years. The judge ordered the dissolution of several corporate entities owned by the Trumps and the appointment of an independent monitor for the Trump Organization. While further potential penalties […]
Category: Business Valuation
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.
Legal Consequences of Inflated Valuations: Trump Case and Beyond
Posted in Business Valuation, on Sep 2023, By: Mark S. GottliebShare
Five Key Considerations When Valuing a Business in a Shareholder Dissolution Case
Posted in Business Valuation, on Aug 2023, By: Mark S. GottliebShare
For the better of the past two years, we have been working on a shareholder buyout dispute centered on the value of a fifty percent interest in a business and its ability to support the buyout provisions. The shareholder’s agreement outlined the valuation standard and the terms of its payment. Despite this direction, each party’s valuation proposed at arbitration was millions of dollars apart. I will save the particulars of this case for another time but share with you that the value opined in our report was accepted in the arbitrator’s binding decision. One of the reasons for this favorable business divorce case outcome was that our client’s attorney respected our focus on essential valuation fundamentals. In return, his direct case and cross-examination led to a well-versed presentation of the issues at bar. Attorneys tend to many issues in a shareholder dissolution case; having a command of opposing valuation reports is just one. Here are five key considerations attorneys should consider when reviewing their experts’ reports and those of the opposing side. 1. Standard of Value The choice of a standard of value is fundamental to the valuation process. Two common standards often considered are fair market value and fair value. Fair market value is defined in Revenue Ruling 59-60 of the Internal Revenue Code: The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to […]
Treasury Yields Are Increasing: How Does This Impact The Valuation of Closely Held Businesses?
Posted in Business Valuation, on Aug 2023, By: Mark S. GottliebShare
Have you seen the bank advertisements looking to lure account holders to open short-term CDs at 4.5% or 4.9%? You may have read this article in the Wall Street Journal tracking the increasing treasury bill rates over the past few months. Where is this coming from, and how will this recent increase in Treasury Yield rates impact the valuations of closely held businesses? Figure 1. Adapted from Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis. FRED | St. Louis Fed. The short answer to this question: It may profoundly impact various aspects of the economy – including the valuations of closely held businesses. The complex relationship between financial variables can reverberate across different sectors. We will delve into the mechanisms behind some of these interactions and explore how rising treasury yields can influence the valuation landscape of closely held businesses. Treasury Yields 101 First, it’s essential to understand what treasury yields are and how they function. Treasury yields represent the expected return from investing in government bonds. This return is often called a “risk-free rate” since the government guarantees it. When yields rise, it generally indicates that the market demands higher compensation for lending money to the government due to factors like inflation and changes in monetary policy. Discount Rate And Present Value An increase in treasury yields directly affects the computation of the discount rate and, in turn, affects the valuation of closely held businesses. In business valuation, the discount rate is […]
What To Consider In Determining Owner’s Compensation
Posted in Business Valuation, on Jan 2021, By: Mark S. GottliebShare
Whether a company is being valued for a shareholder or an equitable distribution dispute, one of the most common normalization adjustments to a subject company’s income stream is owner compensation. Both the Court and the IRS tend to closely scrutinize this issue, with the IRS in frequent disagreement as to the reasonableness of shareholder-employee compensation. For income tax purposes, business owners typically prefer to classify payments as tax-deductible wages. This allocation reduces both their corporate taxes and their federal taxable income. As one might imagine, the IRS is correspondingly meticulous in its examination of these classifications. If it believes that owner compensation is excessive, it may claim that non-deductible dividends have been disguised as compensation. As they pertain to business valuation, the determination and application of reasonable shareholder-employee compensation are similarly contentious. The correlative relationship between owner compensation and cash flow means that when compensation is inflated, the available cash flow is reduced. Correspondingly, the indicated value under the income approach will be likewise reduced. But whether challenges to owner compensation emanate from taxing authorities or a rival valuation expert, the case law in this area strongly indicates that there is no global rule of thumb – reasonable officer compensation is determined according to the particular circumstances of an individual case. It is for this reason that Trial and Appellate Courts often struggle to resolve questions regarding reasonable officer compensation. For non-valuation professionals, this confusion is perhaps attributable to the number and diversity of sources used to ascertain reasonableness. […]
The Biden-Harris Ticket Promises To Make Major Tax Changes. Your Clients May Want To Act Now.
Posted in Business Valuation, on Nov 2020, By: Mark S. GottliebShare
This has certainly been an eventful week. My beloved New York Mets were sold. Although I believe Steve Cohen will be up to the task, I am somewhat resentful that my bid to purchase the Amazins was rejected. On the other side of the plate, Joe Biden can claim victory in the turbulent presidential election. Despite the possible legal battle, it appears that the Biden-Harris battery is now warming up for a January 2021 inauguration. President-elect Biden has made no secret of his intent to raise $3.5 trillion in taxes over the next ten years. The intended contributors will be corporations and individuals earning over $400,000 per year. Conversely, lower-income taxpayers may benefit from tax-cutting incentives from items such as refundable credits, etc. Biden’s ability to effectuate any tax change heavily depends upon the Democrats’ ability to win both the House and Senate. The Democrats currently hold a majority in the House of Representatives but are taking swings at the two remaining Senate seats up for grabs. If the Democrats sweep both available seats and get a 50/50 split in the Senate, then the Biden tax reform vision could theoretically be passed without a single Republican defector. Pending a home-field advantage, the Biden tax reform could pass via a Budget Reconciliation which will not require 60 votes for passage. Alternatively, they will only need a majority of 51 votes. Assuming everyone votes along the party line, Vice President-elect Kamala Harris will cast the deciding vote. Without the benefit of […]
What Has COVID-19 Taught Us About Neutral Experts?
Posted in Business Valuation, on Oct 2020, By: Mark S. GottliebShare
The news cycle is currently inundated by the testimony of medical professionals of various backgrounds and experience, and as we have seen, their opinions and advice can starkly differ. While many have advocated for social distancing and the use of masks, others have sought to cast doubt on the productivity of these measures, claiming either that they are unnecessary or that they have no impact on the virus’s transmissibility. Recently, lawyers for the CT Freedom Alliance offered two medical expert witnesses that were subsequently rejected on the basis that neither was sufficiently qualified to serve as an expert. In response to one individual’s previous attestations that viruses are nonexistent and vaccines poisonous, Judge Thomas G. Moukawsher expressed his clear inclination that established scientific evidence should not be disputed. This is an extreme example but one that bears mentioning. Judges are frequently confronted with radically opposing partisan expert opinions. Irrespective of their familiarity with the subject at hand, they must decide as to which opinion is most correct. With regards to COVID-19 and the preventative measures thereof, there are a sufficient number of credible and widely circulated opinions as to make the credibility (or lack thereof) of witnesses such as those described above relatively obvious. But what of matters that concern subjects that aren’t so broadly known? Let us take for example the industry accepted principles and standards in business valuation. In a matrimonial, shareholder, or estate dispute, it is often that both parties hire a business valuation expert. Occasionally, […]
Analytical Tools For Attorneys
Posted in Business Valuation, on Sep 2020, By: Mark S. GottliebShare
For those of you familiar with our valuation and forensic reports, you know first-hand that we use various tools to analyze and illustrate the financial capacity of a subject company. To examine financial characteristics, we often compare the subjects’ financial ratios to their peer group. For example, the subject company may report travel and entertainment expenses as 5.0% of annual sales. If the subject company reports T&E at 15.0% of sales, further investigation may indicate that this category contains excess owners’ perquisites. To illustrate these and other financial trends, we use charts and other demonstratives. One of my favorite analytical tools is a SWOT analysis. SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses generally refer to: • Financial resources (funding, sources of income, and investment opportunities) • Physical resources (location, facilities, and equipment) • Human resources (employees, volunteers, and target audiences) • Access to natural resources, trademarks, patents, and copyrights, and • Current processes (employee programs, department hierarchies, and software systems) While opportunities and threats consider: • Market trends (new products, technology advancements, and shifts in audience needs) • Economic trends (local, national, and international financial trends) • Funding (donations, legislature, and other sources) • Demographics • Relationships with suppliers and partners • Political, environmental, and economic regulation We commonly illustrate the SWOT analysis in chart form, which draws the reader’s attention to those areas of greatest significance. Another tool we frequently use is Michael Porter’s Five Forces theory. For those of […]
Valuing Promissory Notes In Difficult Economic Times
Posted in Business Valuation, on Jun 2020, By: Mark S. GottliebShare
Despite the recent partial rebound of the stock market, the economic realities developed in the second quarter of 2020 is having a devastating effect on the economy. Unemployment is at an alarming rate, several prominent businesses have declared bankruptcy, and many businesses, small and large, are debating their future. That being said, this new reality may provide estate planning opportunities to reduce gift and estate taxes. In this blog, I’d like to discuss the valuation of promissory notes and how their valuation may be affected during times of economic hardship. Promissory notes are commonly used to transfer assets between family members. Sometimes these notes are part of a gifting program; other times, it may be an asset of an estate. In either instance, the note needs to be valued. Standard of Value The standard of value in gift and estate matters is fair market value. Fair market value is defined in Revenue Ruling 59-60 [2.2 Section 20.20231-1(b) of the Estate Tax Regulations (Section 81.10 of the Estate Tax Regulations 105) and Section 25.2512-1 of the Gift Tax Regulations (Section 86.19 of Gift Tax Regulations 108)] as “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 fair market value standard assumes that the price is transacted in cash or cash equivalents. Court decisions […]
The Valuation Impact the Coronavirus will have on Closely-Held Businesses
Posted in Business Valuation, on Mar 2020, By: Mark S. GottliebShare
The NBA & NHL have suspended play. MLB has postponed the start of its season. Public & private schools around the country are closing. Locally, the NYC St. Patricks’ Day parade and other large public gatherings are canceled, amongst the rumors surrounding that the city will order a mandatory quarantine. These are just a few of the headlines we have heard and read this week in response to the current coronavirus pandemic. The health of our family, friends, and neighbors is paramount at this time. Still, as the stock market seems to be in freefall, one can only wonder what impact the coronavirus will have on the short-term and long-term valuation of closely-held businesses. The micro and macroeconomic communities have experienced this turmoil before. Of course, there was 911 and the financial crisis of 2008, but when was the last time the spokes on the economic wheel have slowed down or stopped because people were either too sick to work or discouraged from going to work? Yes, many of us will be able to work from home; but let’s be honest – it will not be the same. Local restaurants and attractions expect to see a drastic decrease in business; the travel and hospitality business is flooded with cancellations, despite offering services at unheard-of low prices. (Someone told me you could fly to Florida this weekend for $50.) If you are one of our frequent readers, you are familiar with the three general methods of valuation, the asset, market, […]
Classifying Shareholder “Loans” In Business Valuation
Posted in Business Valuation, on Jan 2020, By: Mark S. GottliebShare
Are loans due to or due from shareholders a bona fide debt obligation, a form of equity capital, or a hybrid of the two? This distinction is relevant when valuing a business – particularly in a shareholder dispute or in a divorce case. I customarily devote a good portion of class time discussing this issue in my class at Fordham Law School. This distinction may cause a material difference in the ultimate valuation of a closely-held business or even the income attributed to its owner. Often, experts turn to the Internal Revenue Service for objective guidance on this issue. What Would The IRS Say? Owners occasionally borrow funds from their businesses, say, to pay a child’s college costs or provide a down payment on a vacation home. These loans to shareholders appear on a company’s balance sheet as a receivable. For loans of more than $10,000, the IRS requires taxpayers to treat the transaction as a bona fide debt. Then the company must charge the shareholder an “adequate” rate of interest. Each month the IRS publishes its applicable federal rates (AFRs), which vary depending on the term of the loan. If the company doesn’t charge interest or follow a complicated set of below-market interest rules to impute interest on the loan, the IRS may claim the shareholder received a taxable dividend or compensation payment rather than a loan. The company may deduct the latter, but it will also be subject to payroll taxes. However, both dividends and additional compensation […]