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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.

Welcome To The Tax Cuts & Jobs Act

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

I know that 2018 has begun with frigid temperatures for those of us in the Northeast, but I want you to get up from your desk, open up your office window and listen to what’s happening outside. That galloping sound you hear isn’t construction work, it isn’t local traffic, or planes flying above. It is the masses of divorcing couples, business owners, and retirement minded individuals running to their matrimonial, estate and corporate attorneys. On December 22, 2017 Congress passed and President Trump signed into law The Tax Cuts and Jobs Act (hereafter, “the Act”). The Act is the most significant change to the current tax law in three decades. In its most simplistic terms the Act (1) lowers individual and corporate tax rates, (2) eliminates multiple tax credits and deductions, (3) increases the child tax credit, and (4) repeals the healthcare individual mandate penalty. Matrimonial and Family Law Attorneys should be aware that for those that separate and/or divorce after December 31, 2018 alimony payments will no longer be taxable to the recipient or deductible by the payer. Gift and Estate Attorneys should note that the estate and gift tax exclusion amounts have doubled after December 31, 2017 and before January 1, 2026. Corporate Attorneys should know that the corporate income tax rate has been simplified to a flat 21 percent and that owners of pass-through entities will be taxed at a 20 percent income reduction calculation. So the question you may be asking is: Why is a boutique […]

Proposed Changes to IRC Section 2704

Posted in Business Valuation, on Oct 2016, By: Mark S. Gottlieb

Introduction MarketWatch recently published an article outlining a report written by the global wealth consultancy, Wealth-X, and the insurance brokerage and consulting firm, NFP, which predicts that ultra-high-net-worth individuals will transfer $3.9 trillion to the next generation by 2026.The article writes that this massive global transfer, which it describes as the largest wealth transfer in history, has already begun. It states that, as of last year, ultrahigh-net-worth individuals 80 years of age or older are, on average, seven times wealthier than those 30 years of age or younger. These older, extremely deep-pocketed individuals are now in a position to transfer wealth to their family members. As the article writes, a recent survey conducted by Knight Frank found that the biggest concerns for these individuals are “succession and inheritance issues,” which likely derive in part from the complicated regulations imposed by the Internal Revenue Service. These concerns were likely amplified in the beginning of August 2016 by the official IRS release of the proposed changes to Internal Revenue Code § 2704, which handles rules for valuation discounts that affect transfers of family-owned equity interests or partnerships. The recently proposed changes to Internal Revenue Code § 2704 would affect not only the superrich, but anyone planning to transfer an interest in a family-owned corporation or partnership to a family member. These regulations would eliminate valuation discounts for transfer interests and likely limit the financial benefit of these transfers. The best strategy for an individual planning to transfer interests in a family business […]

Weighting Different Methods To Determine Value

Posted in Business Valuation, on Sep 2016, By: Mark S. Gottlieb

Unity Technologies, a previously nondescript software development company, has grown significantly in value over the past few months with the release of the viral mobile app, Pokémon Go, which was created using Unity’s software. The company has recently been valued at around $1.5 billion. This consensus comes from an amalgamation of different data including the company’s past financial performance, trends in the market, and the company’s owned resources. In performing this or any other valuation one needs to decide the relevancy of each type of data. For instance, Unity’s past performance may be a good prediction of the company’s potential but does not account for the growing market for programs that produce augmented reality, an area in which Unity specializes. These considerations are an important aspect of business valuation. In a typical business valuation, the analyst will often use three general valuation approaches: (1) the income approach, (2) the market approach, and (3) the asset approach. Each of these approaches uses different data to estimate the value of the subject company, which inevitably results in slight disparities between the outcomes. In order to come to a consensus on value, the analyst must decide how to weight each outcome. There is no official formula for calculating weights in business valuation. In fact, Revenue Ruling 59-60 of the Internal Revenue Code states: “Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in […]

Discretionary Expenses in Business Valuations

Posted in Business Valuation, on Jun 2016, By: Mark S. Gottlieb

(Reading time: Under 2 minutes) In an episode of the critically acclaimed sitcom, Arrested Development, aspiring magician and underachieving employee of the Bluth family business, G.O.B Bluth, tells his brother, Michael, “I figured out a way to make money while I’m working.” Michael, the work-oriented and responsible Bluth brother, replies, “But that is what we call working.” G.O.B. rarely performs work that adds to the value of the business, but, as a member of the Bluth family and officer of the Bluth Company, he is on the company payroll. His salary is an example of a discretionary expense that can affect the understanding of the company’s value. Business owners typically have a fair amount of flexibility to choose how they compensate themselves and their officers. The IRS mandates that the officers of a corporation, including the CEO, president, vice president, and any other shareholder employees, must be paid a “reasonable compensation” for their labor, but what qualifies as “reasonable” is left unclear. Depending on the nature of the business in question, there could be many factors that affect the level of compensation chosen for the business’s shareholders, including the following: When possible, companies tend to pay their officers wages that reduce taxes. For example, a C corporation might increase their shareholder’s compensation, and eliminate dividends, to avoid double taxation, while an S corporation might decrease their shareholder’s compensation in order to reduce payroll taxes. The shareholders may be receiving deferred compensation that was earned in previous years when the company […]

It is often assumed that a business valuation is only necessary in instances of conflict or litigation, but business valuations can be very useful in identifying ways to increase the value of an existing business. When business owners get valuations, they are often surprised by the lower-than-anticipated results as it is easy to overvalue personal assets and lose sight of the fact that market value is based almost exclusively on objective data regarding future profitability. It is essential that business owners have an accurate knowledge of their businesses value in order to be in a position to increase its worth. A business valuation expert would be able to provide an exact valuation and help the business owner develop a long term plan to increase the business’s market value.  The specifics of this plan would be dependent on the company’s position in the marketplace as well as its financial growth history. There are a few basic techniques that typically work to increase a business’s value. You may want to consider one or more of the following: Increase Profitability. Look at the future prospects in the market and work to ensure that profits will continue increasing, Find efficiencies that cut cost, Grow intangible assets, Establish sales and/or marketing departments, Increase employee retention, and/or Diversify revenue by producing a larger variety of products or services. Simplify. Establish seamless procedures and routines, Create recurring revenue statements, and/or Reduce or eliminate shareholders loans. Organize. Tidy up the business’s physical location, and/or Neatly catalog important documents. […]

Valuing Covenants Not to Compete

Posted in Business Valuation, on Feb 2016, By: Mark S. Gottlieb

The guest on Thursday’s episode of The Daily Show, Airbnb CEO Brian Chesky, explained that value in the American economy is becoming less associated with ownership and more associated with experience. Airbnb has revolutionized travel and hospitality by allowing users to pay to stay in the homes of other users, rather than in hotels. Trevor Noah, the host of The Daily Show, joked that Airbnb and other similar organizations are making ownership obsolete: people no longer need to purchase cars, homes, or, now, pay for hotels. In a serious tone, Chesky explained that this decline in ownership came with an increase in the value of experience. He said that a person’s value is now shown through their Instagram feed rather than the size of their house or worth of their car. Though this shift in value may signify a change in economic ideology, intangible assets, such as experience, have long accounted for a surprisingly substantial amount of a company’s total value. A company’s intangible assets bring value to the business without having a material presence. Essentially, intangibles come from employees’ experiences. Types of Intangible Assets Intangible assets fall under 5 major categories. The following lists these categories and examples of each: Marketing-related intangible assets    Trademarks,    Logos, and    Domain Names. Consumer-related intangible assets    Customer information, and    Customer relationships. Artistic-related intangible assets    Literary/musical/visual art works, and    Performance events. Contract-based intangible assets    Use rights,    Licensing agreements,    Franchise agreements, and    Employment contracts. Technology-based intangible […]

A 2014 Grant Thornton International Business Report indicates that 29% of privately-held businesses worldwide expect to transfer ownership within the next ten years. This points to the significance of accurate business valuations. Whether or not a business anticipates a change of hands or is trying to get a better understanding of the marketplace, proper business valuation is crucial. Accounting services are often branded under a sole, universal category. Nonetheless, different levels of certification allow CPAs and specialty firms the opportunity to work together in a team-oriented fashion that helps increase efficiency for clients that are in need of business valuation services. There are several factors that limit certain CPAs’ adeptness to provide a proper business valuation. Business valuation experts enjoy the advantages of being credentialed by one or more organizations. Four of the most prominent credentials are: The Accredited in Business Valuation (ABV) – American Institute of Certified Public Accountants or AICPA, The Certified Valuation Analyst (CVA) – National Association of Certified Valuators and Analysts, The Certified Business Appraisers (CBA) – Institute of Business Appraisers, and The Accredited Senior Appraiser (ASA) – American Society of Appraisers. Appropriate credentials should be one of the top criteria considered by clients in selecting and hiring an expert. CPAs that perform traditional accounting or attestation services can be vulnerable to conflicts of interest when it comes to business appraising services. Business valuation firms, on the other hand, are independent and unattached to any side of a negotiation or litigation. In addition to training and […]

Much has been written about valuing a closely-held business. A frequent topic discussed is the income approach and the application of the valuation multiple to a normalized income stream. The valuation multiple (also called capitalization rate) is comprised of a many factors, including the company’s specific risk. Risk is an expression of the business valuation analyst’s judgment, as no database can exist to measure the company-specific risk drivers. The valuation expert must identify these drivers and judge their magnitude in order to estimate the additional rate of return the market would require to offset the investor’s acceptance of additional risk. The factors will vary from company to company, among industries, and over time within the same company. These may include depth of management, importance of key personnel, stability of industry, diversification of product or service, geographic location, earnings margins, etc. Risk is categorized by: business risk, financial risk and liquidity risk. Business risk relates to all factors that may prevent the realization of forecasted earnings. Items which impact sales, cost of sales, or administrative and operating expenses, are a component of business risk. Business risk is company-specific. In evaluating business risk, the valuation specialist should obtain an understanding of the company to determine issues relating to: industry, competition, depth of management, adequate working capital, etc. Financial risk is a narrower company-specific concept. Financial risk relates to interest expense, a factor that can also diminish forecasted earnings. Financial risk may be assessed by how the company’s asset base is financed. If […]

Identifying Business Perks

Posted in Business Valuation, on Oct 2014, By: Mark S. Gottlieb

24/7 Wall St, published, “Eight Outrageous CEO Perks” which detailed various executive perquisites, or “perks.” From Oracle’s Larry Nelson’s $1.53 million security team, to Dow Chemical’s Andrew Liveris’s $98,000 for financial planning, the article revealed some expensive perks of corporate CEOs. In the case of closely-held businesses with a single owner, perquisites provide benefits to owners and reduce business taxes. By placing some company profit into perquisites, they can not only enjoy these perks, but can deduct these costs from the business’s reported income. When valuing a business or determining the normalized compensation of the owner, it is imperative to identify these issues. Perquisites are compensation beyond a normal salary and benefits. These items are discretionary, meaning they are extra compensation and would not necessarily have to be paid to someone else with the same position. Unlike bonuses, which are a lump-sum, perquisites are often in the form of pre-paid services or goods. Perquisites generally fall into a set of common categories: Retirement Plans, Insurance Plans, Pensions, Financial planning services, Tax services, Education, Memberships, Entertainment, Automobile Expenses, Company credit cards, Family Costs, and others. Some perquisites, such as a Supplemental Executive Retirement Plan (SERP), can be rather straightforward to find within a business’s accounts. However, there are some perks are trickier. While many forms of entertainment, such as lunches, are legitimate costs, others can be in excess, or altogether unneeded. One way to examine entertainment perks is to match the costs against industry data. If an executive’s entertainment perquisites are […]

Recently released and on parole, Tyco’s former CEO Dennis Kozlowski was the epitome of excess compensation in the beginning of the millennium. Despite the fact he transformed a small enterprise into a billion-dollar giant, he was convicted of fraud for using Tyco as his “personal piggy bank.” This and other white-collar crimes have led to the creation of better monitoring parameters and resources to help define employees’ salaries, especially those of top executives. Often, owners of closely-held businesses can easily manipulate their business’s profitability by paying themselves more or less than reasonable compensation. Business valuation experts can serve as a reliable professional resource whose contribution goes beyond tests and industry-specific statistics. IRS Guidelines and Parameters Section 162(m)(4)(C) and Section 162(m)(4)(E) of the Internal Revenue Code are both used as guidelines in tracking performance-based compensation. From describing the roles of the board of directors in determining compensation, to establishing further forms of compensation, such as bonuses, these two codes give an outline for investigating an executive or owner’s proper compensation. In addition to the Revenue Code, the IRS’s Fringe Benefits Audit Technique Guide assists by listing the benefits commonly provided to executives, potential issues, and also provides steps to help examine same. Both bonuses and benefits received by owners can be complex and ambiguous depending on the case. Bonuses can be clearly recorded, or simply rely on a handshake. Benefits, similarly, can often not be taxed to the recipient, but rather recorded within the operating expenses of the business. This concept […]