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Many of you may know that I am an Adjunct Professor at Fordham Law School.  This past weeks lecture included a discussion of normalization adjustments to be considered when utilizing the income approach in a business valuation.  As I was presenting my talking points I remembered a lecturer I gave for the Internal Revenue Service many years ago.  During that lecture on tax issues concerning closely-held businesses, I proudly stated that I could show business owners how to avoid (not evade) corporate income taxes by modifying shareholder-employee compensation before year-end.  As you can imagine, my remarks were not warmly greeted by the IRS representatives in the audience. The IRS and closely-held business owners often disagree about the reasonableness of shareholder-employee compensation.  This disagreement is found in both income tax and business valuation instances. For income tax purposes, business owners usually prefer to classify payments as tax-deductible wages because it lowers its federal taxable income and corporate taxes. But, if the IRS believes that an owner’s compensation is excessive, it may claim that payments are disguised dividends, which aren’t tax deductible. The determination and application of reasonable shareholder-employee compensation is also often a contested issue in business valuation.  When shareholder-employee’s compensation is overstated, the available cash flow is often lower and the indicated value (under the income approach) is less.  For this and other reasons, the determination of officer compensation is often a contested adjustment. Whether this conflict is between the taxing authority or an opposing valuation expert, the case law […]

  Splitting up a marital estate can be a long and complicated process, particularly if one of the assets includes a privately owned business. Fortunately, a valuation analyst can assist attorneys and their clients address these issues – even at the early stages of the matrimonial action. These preliminary issues often include, but may not be limited to: How much is the business actually worth? Do you need to be concerned about the issue of “double dipping” when considering the valuation of a business and the money spouses support obligations? Is the spouse that owns and operates the business deceptive when it comes to reporting his/her income? In this blog post we quickly discuss these three issues.  For those of us that travel down this road often – you know that the totality of the financial concerns in a matrimonial matter can be significant. How much is the business actually worth? There are three methods used to value a business: the asset, market and income approaches. All of these techniques start with the analysis of the company’s financial statements. But discovery shouldn’t stop there, especially for spouses who aren’t involved in day-to-day business operations. Valuation experts should be given equal access to financial records and opportunities to tour the company’s facilities and interview management. Inadequate discovery can cause an expert to miss critical information and possibly lead to an inaccurate conclusion of value. If the business interest was owned prior the marriage, it might be appropriate to include only the […]

  Family-owned businesses aren’t usually run like large public companies. From the Rockefellers to the Kardashians, working together can bring out the best – and worst – in families. Here are four key issues to consider when valuing these entities. 1- Are family members on the payroll? The terms “family business” and “nepotism” often go hand in hand. Although some business owners hire family members because they’re perceived as more trustworthy, many hire them out of obligation or to satisfy a desire to pass the business on to their offspring. When valuing family-owned entities, business appraisers objectively consider whether family members are qualified for their positions and whether their compensation is reasonable. In some cases, management of a hypothetical buyer might want to consolidate family members’ positions and use fewer people to perform their duties. As a result, valuation professionals often make an upward adjustment to cash flow to reflect the excess expense of employing relatives. But the reverse may also be true. Some family businesses overwork or underpay related parties. Consider, for example, business owners whose passion for their work and desire to succeed lead them to work exceptionally long hours. When evaluating a related party’s compensation, experts look beyond the family member’s base pay. For example, they must also adjust for payroll taxes, benefits and extraneous perks. Perks may include such things as allowances for luxury vehicles, country club memberships or loans at below-market interest rates. 2 – Are there other related-party transactions? Family-owned businesses may engage in […]

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 […]

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 […]

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 […]

(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. […]

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 […]