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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.

  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. […]


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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 […]


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  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 […]


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  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 […]


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  According to a recent Delaware Division of Corporations Annual Report, more than 66% of the Fortune 500 companies are registered in the State of Delaware.  That being said, it is not surprising that the Delaware Chancery Court is widely recognized as one of the nation’s leading courts in settling shareholder appraisal disputes. Delaware affords protection to shareholders by granting appraisal rights within Delaware §262 where fair value is defined §262(h): After the Court determines the stockholders entitled to an appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. This definition can cause an appraiser to consider alternative methodologies and/or apply discounts and premiums differently than for different jurisdictions or for tax valuations. As you may be aware, Fair market value as defined by Revenue ruling 59-60 is:  “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 […]


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  When planning to merge with or acquire another company, a business owner needs to identify what’s actually being sold and estimate what those assets are really worth. Often the most valuable assets — such as goodwill, brand names, customer lists and patents — don’t appear on the balance sheet. A pre acquisition purchase price allocation helps an owner determine whether a purchase price is reasonable. In addition, how the purchase price is divvied up on the acquirer’s balance sheet has an impact on future earnings — thus affecting the transaction’s perceived success. Identify the assets Under Generally Accepted Accounting Principles (GAAP), companies that merge with or acquire another must allocate the purchase price among the assets and liabilities acquired according to Accounting Standards Codification (ASC) 805 (formerly covered by Statement of Financial Accounting Standards No. 141R). The first step in any purchase price allocation is to identify all tangible and intangible assets included in the deal. Examples of tangible assets are accounts receivable, equipment and inventory. To help categorize identifiable intangible assets, ASC 805 provides a framework based on whether the asset is related to: Marketing (trademarks, noncompete agreements, Internet domain names), Customers (customer lists, production backlogs), Artistic practice (copyrighted books, articles, photographs), Contracts (royalty agreements, franchises, leases, employment contracts), or Technology (patents, trade secrets, in-process research and development, computer software). The acquirer must estimate a useful life over which to amortize each intangible asset. But some intangible assets, such as brand names and in-process research and development, may […]


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If I had to do all over again I would have placed an empty pickle jar besides my desk and throw in a dollar every time a business owner proclaimed his/her business would be nothing without them.  At times, I feel the same way. But, my education and experience tells me otherwise.  That being said, if the business owner or another individual disproportionately accounts for the business’s success, it’s important to consider whether the risk of losing such a “key person” warrants an adjustment to the company’s value.   What’s a key person discount? A key person discount may be appropriate if a single owner or employee who would be difficult to replace is responsible for much of the company’s profitability and continued viability, especially when none of the company’s management team members are qualified to assume the key person’s responsibilities. The discount — usually a specific dollar amount or percentage — is taken to reflect the actual or potential departure of a key person. Instead of taking a separate, discrete discount at the entity level, some experts incorporate a key person discount into their valuation methodology. For example, under the income approach, a valuation expert might adjust the discount rate, capitalization rate or projected cash flows to reflect key person risks. Alternatively, an expert who uses the market approach might adjust the pricing multiples to reflect this risk. When are key person risks relevant? Owning a small business isn’t enough to justify a key person discount. These adjustments are […]


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The Hunt For Hidden Cash and Unreported Income

Posted in Business Valuation, on Jun 2018, By: Mark S. Gottlieb

  Discussing hidden cash and unreported income is always a popular topic for both commercial litigators and family law attorneys.  Currently, we are working on a number of business valuation engagements that have developed into “full blown” forensic accounting and fraud exercises.  Since these issues are currently on my mind, I thought a quick review of some of these issues and techniques would be of interest. Hunt For Hidden Cash Contrary to conventional thinking, forensic accountants don’t automaitclly assume that every closely-held business owner hides cash.  Arguably, some business are more susceptible than others. However, when red flags appear, further due diligence is often required. Experts (as well as IRS investigators) typically rely on certain forensic accounting techniques to prove that cash is missing and to estimate how much income the business owner isn’t reporting. These methods include: Bank deposits. This method involves reconstructing income. In this instance we analyze the spouse’s bank deposits, canceled checks and currency transactions, accounting for cash payments made from undeposited currency receipts, as well as nonincome sources of cash. Nonincome cash sources might be loans, gifts, inheritances or insurance proceeds. Source and funds application. Here, the business owner’s personal sources and uses of cash are analyzed. This approach can be effective in determining where the owner’s income and other funds came from, and how they eventually were used. If the owner is spending more money than he or she is taking in, the excess represents unreported income. Net worth. An unsubstantiated increase in a […]


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Beyond Financials: A look At Key Value Drivers

Posted in Business Valuation, on Jun 2018, By: Mark S. Gottlieb

  Make no mistake about it: Analyzing and understanding the subject company’s financial statements is paramount when opining to value. However, when you start “peeling the onion” other factors play an important role.  This is why you can value two similar businesses simultaneously and arrive at different values. These other factors are commonly referred to as “key value drivers”. Key value drivers can range from a business’s culture, tangible assets, and/or intellectual property. The following provides just a few that should be considered beyond a company’s financial composition. Customers & Competitors Dependency on a few or limited customers will almost always make a business vulnerable.  In other words, a diversified customer base is almost always preferable.  A customer base that extends across several geographic regions or market sectors may add even greater value than one would expect.  This is not just a valuation expert speaking, but a sentiment shared by many sophisticated buyers. An industry by itself can also be a value driver – particularly if the sector is expanding rapidly. Business analysts are often attracted to startups in a young, hot industry – rather than one solely dependent upon organic growth. Keep in mind that you can’t use industry as your sole determinant of value.  Value and the valuation process acknowledges when a company distinguishes itself from the herd.  For example, does the subject company have a unique intellectual property or unusually efficient supply chain? Internal assets Favorable internal factors may also drive a company’s value. Although these factors […]


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  As the business valuation discipline matures, judges, attorneys and other people who rely on appraisal conclusions are becoming more comfortable with the income approach. But how does a business’s perceived risk translate into a reasonable discount rate? This is one of the most subjective — and contentious — aspects of valuing a business. Breaking down the income approach Under the income approach, value is a function of a company’s expected economic benefits and its risk relative to other investment types. Valuators typically gauge expected economic benefits in terms of net cash flow. They measure risk by the company’s cost of capital, which is the expected rate of return investors require to invest in the subject company. Riskier businesses have lower values as a result of lower projected income, higher discount rates — or a combination of these. The two most common methods that fall under the income approach are the capitalization of earnings and discounted cash flow methods. Discounting future cash flow The key to both of these methods is converting expected cash flows (or other economic benefits) to present value. This requires the valuator to use a discount rate that reflects the time value of money and the degree of risk associated with an investment in the business. Put another way, the discount rate reflects the risk associated with achieving the expected cash flows. When valuing a company’s equity, valuators may estimate expected cash flows to equity investors and use the cost of equity as the discount rate. […]


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