Blog

Category: Financial Advisory

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.

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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2018 Year End Tax Strategies

Posted in Divorce & Matrimony, on Dec 2018, By: Mark S. Gottlieb

  It seems like a lifetime ago that I sat down at my desk with a pile of folders ready to attack “tax season”.  Perhaps it was.  It’s been almost 30 years since I moved to be “exclusive” with business valuation, forensic accounting and litigation support. Although I am no longer routinely prepare income tax returns, I still keep up with the tax code – for no other reason than to be fluent when asked to lecture at various legal conferences or provide expert testimony. So, in the season of giving, I thought I would provide some thoughts regarding a few selected tax issues you should consider before the end of the year. Year-end tax strategies for accrual-basis businesses The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2018 tax bills. The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2019. Doing so will enable you to deduct those expenses on your 2018 federal tax return. Common examples of such expenses include commissions, salaries and wages; payroll taxes; advertising; and interest. Also look into expenses such as utilities, insurance and property taxes. You can also accelerate deductions into 2018 without paying for the expenses in 2018 by charging them on a credit card. (This works for cash-basis taxpayers, too.) In addition, review all prepaid expense accounts […]


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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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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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Noncompete agreements can help businesses retain valuable employees, safeguard inside information and prevent unfair competition. But though they’re designed to protect companies, they can also put them at risk if they’re not properly structured and maintained. This article explains how valuators help ensure noncompete agreements are valued appropriately and are fair to all parties.


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Detecting Financial Statement Fraud

Posted in Financial Advisory, on Sep 2016, By: Mark S. Gottlieb

Recently, Bloomberg reported that Fiat Chrysler Automobiles is under investigation for potential securities fraud after being accused of inflating U.S. car sales. The company is said to have coordinated a scheme in which individual dealers were paid to create false sales reports, thereby exaggerating financial performance and deceiving investors. Unfortunately, instances of fraudulent financial reporting such as this one have become somewhat commonplace among corporations under pressure to meet earning expectations or to conceal declining financial performance. Fraudulent financial reporting is any intentional misstatement of, or omission from, the financial statements of a company with the purpose of misleading the statement users. The complexity of financial statement fraud has garnered significant attention over the past decade.  It has become clear that there are a variety of subtle methods used to manipulate expenses and revenues that are not easy to detect without knowledge of the necessary analytical tools. In 2002, following a series of major corporate financial fraud scandals, Congress passed the Sarbanes-Oxley Act which enacted strict reforms to financial reporting standards in the hopes of protecting investors from potential fraudulent accounting activities. In spite of these new standards, the number of fraud cases, as well as the dollar value of false financial reporting’s, has continued to rise for the past 14 years. Most cases of financial statement fraud take the form of either improper revenue recognition, misstatement of assets, liabilities or expenses. It is nearly impossible to trace the source of every revenue stream, verify the existence of all reported […]


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Dealing with Fraud: A Simple Four Step System

Posted in Financial Advisory, on Apr 2016, By: Mark S. Gottlieb

Modern day examples of fraud don’t always take the form of mustachioed Ponzi-types with elaborate systems of deception. Today, elusive acts of fraud in the workplace are running rampant, especially throughout small businesses.   The ability to commit and get away with fraud has become even more accessible with the increased use of social technologies in the workplace. Tech savvy fraudsters can use anything from Facebook messaging to Snapchat to communicate plans for manipulating company funds in a way that is difficult to detect. If you or your client is suspicious of fraudulent activity in the workplace, it is essential to take the steps necessary to resolve the issue as quickly as possible. The following four steps should be taken to stop any potential fraudulent behaviors: Detection of Potential Fraudulent Activity in the Workplace The two main types of business fraud are (1) inappropriate personal use of business assets and (2) falsifying financial statements. These types of fraud can come in many forms, including but not limited to the following: Embezzlement, Forgery of official documents, Tampering with bank records, Inventory theft, Benefitting from placing a redundant order, Using company credit cards for personal expenses, Selling business assets under the market value, Manipulating the overtime periods, and Creating fictitious expenses and obtaining disbursements. If any of these behaviors are suspected, it is important to investigate. Forensic Investigation Although most employers wouldn’t like to think of their employees as the type to commit fraud, fraudulent behavior is surprisingly prevalent, especially among smaller […]


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Types of Fraud in Business

Posted in Financial Advisory, on Apr 2015, By: Mark S. Gottlieb

Under former Attorney General Eric Holder’s leadership, the US Justice Department drastically increased its fight against fraud, bringing in more than $24 billion in penalties. This substantial sum came mainly from the department’s pursuit of big banks for financial misconduct. Yet it also increased its crackdown on smaller instances of fraud. Fraud is prevalent in many facets of life, particularly within businesses. This swindling can come in many forms and eats away at a business’s funds. According to the Association of Certified Fraud Examiners (ACFE), on average, businesses lose 5% of revenue each year to fraud. Additionally, 22% of the cases examined by the ACFE involved losses of at least $1 million. Therefore business owners, attorneys, and investigators should know what types of fraud occur, how to look for them, and how to prevent them. Asset Misappropriation Fraud  To put it plainly, asset misappropriation takes place when someone steals funds from his employer. Asset misappropriation constitutes the most common type of fraud affecting businesses. What follows is a list of the most commonly encountered forms of asset misappropriation, ways to discover them, and methods of prevention. Authorized Maker An authorized maker is a person with the power to create and sign checks for a company. In this scheme, the authorized maker creates a check payable to himself, or one that pays his expenses, later altering the payee name in the accounting records to make the disbursement look like it was made to an authentic vendor. This scheme can be recognized […]


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Cross-Examining a Financial Expert – Part I

Posted in Financial Advisory, on Nov 2014, By: Mark S. Gottlieb

We’ve seen it in the movies. A cross-examination where an attorney seeks to identify weaknesses in an opposing side’s conclusions by questioning a witness. Often an entire case can hinge on a cross-examination. As opposed to direct examination, where the exchange between lawyer and witness is warm and fuzzy, cross-examination is often hostile. In financial litigation, expert witnesses are often certified forensic accountants. If the opposing side is using a forensic accounting expert as a witness, it is important to retain one as well. In their role as a litigation support analyst, the forensic accountant should be given all of the opposing side’s reports. Comparing these reports with their own, they can find any discrepancies and differences and then use these to begin building a cross-examination strategy. There are three steps to follow for a sound strategy. Reject or question expert’s opinion. Ultimately, the goal of a cross-examination is to call into question the credibility of the expert’s opinion or findings. This is where one’s own forensic accounting expert will use their knowledge of the complex terminology and methods to point out weaknesses in the opposing expert’s work and conclusions. One method of discrediting an opinion is with a Daubert Challenge. This is a challenge which examines five different aspects of an expert’s methods to verify their authority. They are: Whether the theory or technique used can be and has been tested; Whether the method has been subject to peer review and publication; Its potential or known error rate; The existence […]


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