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Category: Shareholder Disputes

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.

  The hiring of a joint business valuation expert can often be useful. This strategy assumes that the parties will openly share information and act in good faith. But it may not be realistic in all situations, including contentious divorces and shareholder disputes. Sharing fees and information When using a joint valuation expert, the parties will only be satisfied by the outcome if there’s a mutual perception of fairness. Perceived fairness is enhanced when: • Both parties have a say in the interviewing and selection of the credentialed expert, • The expert and both parties have full access to relevant information, such as tax returns, financial statements, responses to questionnaires and notes from site visits, • The expert’s communications between the parties are shared, and • Both parties contribute to the expert’s costs. The expert should explain upfront that the valuation will be performed in an objective, unbiased manner. If either party suspects that a joint valuation expert is biased, dissatisfaction may ensue, possibly leading to appeals and additional fees. Potential upsides When the conditions are right, using a joint expert can benefit both sides. The benefits extend beyond just saving money and streamlining the valuation process. A joint expert also helps minimize disruptions to business operations from site visits, information requests and management interviews. Additionally, parties that share a valuation expert prove that they can trust each other, improving the chances of effectively working together in the future. For example, buyers and sellers who share an expert to conduct […]


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Without a site visit it can be difficult for a valuation expert to gather all of the information needed to fully understand a business’s operations. This article provides insight on how these steps facilitate the valuation process and discusses a recent valuation engagement in which our request for a site visit was rejected.


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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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  I was recently retained to prepare a valuation report for a shareholder dispute. Our office prepared a draft report utilizing the fair value standard, which is the standard to be used in New York State for such cases. Counsel invited both experts to a meeting hoping to settle the case without the need of costly litigation. The opposing expert came armed with a plethora of schedules and worksheets computing the minority shareholders interest – but to the surprise to all, the experts opinion was developed under the fair market value standard. The terms “fair value” and “fair market value” are sometimes used interchangeably. To a business valuation professional, however, they have very different meanings. Adding to the confusion, “fair value” may be statutorily defined for shareholder litigation (NYS) and divorce purposes (NJ) – and that definition may vary depending on the case’s venue. Moreover, fair value means something entirely different when it’s used for financial reporting purposes. (See “Fair value under GAAP.”) Ultimately, an expert’s conclusion can differ significantly, depending on which standard of value is appropriate. Fair market value Fair market value is probably the most widely recognized valuation standard. It’s commonly used to value businesses or business interests for sale and tax purposes. The IRS defines fair market value in Revenue Ruling 59-60 as “[T]he 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 […]


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  Information presented on a company’s financial statements may not always be meaningful from a valuation perspective – even if it follows U.S. Generally Accepted Accounting Principles (GAAP). Whether financial information is obtained from business income tax returns or audited financial records, valuation experts often make adjustments to get a clearer picture of a company’s financial position, market risk and ability to generate cash flow in the future. In some instances these adjustments may be due to some nefarious actions of the business owner.  In other instances they may just be due to elections in accounting methodology or procedures.uing a business interest. Although these adjustments vary from case to case, many of them fall into one or more of the following types when valuing a business interest. Nonstandard accounting practices, Extraordinary or nonrecurring items, Hidden assets or liabilities, and/or Discretionary spending. The following is a condensed review of these common adjustments. 1. Nonstandard accounting practices A valuation expert may estimate value by using pricing multiples derived from comparable private and public transactions (under the market approach) and discount rates derived from returns on public company stocks (under the income approach). Thus, if the subject company deviates from how other companies in its industry typically report transactions, the valuator may need to make adjustments. Certain financial reporting practices may require adjustment, if the subject company’s methods differ from industry norms. Examples include differences in inventory, depreciation or revenue recognition methods. For example, if a company uses the last-in, first-out method (LIFO) […]


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You have just picked up a new case. Your client is a partner in a small or medium sized professional practice.  Maybe it’s a medical practice, an accounting office or even a law firm. You were hired to serve as counsel in a shareholder dispute or even a divorce?  It really doesn’t matter. What does matter is that your clients’ equity interest needs to be valued. After a long afternoon with your client you realize there are a number of issues that may derail a quick resolution to this dispute.  Even now, you may have more questions than answers.  Setting aside those concerns specific to your clients’ practice and profession – there are a few issues you need to consider. What is the appropriate standard of value to be used? What is the appropriate date of the valuation? and How is goodwill to be determine? (if at all) These issues are important to establish your client’s equity interest value, as well as other issues that may be germane.  For instance in a matrimonial setting spousal and child support needs to be determined.  In a shareholder/partner dispute income distributions and loans may need to be analyzed. The following provides a short discussion of same. 1. Standard of value The use of an incorrect standard (of value) can render a valuation report and the related testimony inadmissible. Fair market value and fair value are among the most common standards, but some jurisdictions now call for “intrinsic value.” Fair market value as defined […]


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Shareholders with the forethought to sign buy-sell agreements help facilitate voluntary and involuntary transfers between shareholders. But when it’s time for a buyout, many shareholders discover that their agreements don’t cover all of the necessary details. Here are four key terms to consider when drafting or reviewing a buy-sell agreement. 1. Definitions One of the leading causes of disputes in shareholder buyouts is failure to provide valuation guidelines and define key terms. For example, buy-sell agreements often state that the buyout price is the value of an interest in the business. But “value” can mean different things in different contexts, so the agreement needs to spell out whether the price should be based on fair market value, fair value, investment value or some other standard of value. Moreover, every valuation is effective “as of” a certain point in time, and the valuation date can have a big impact on the result. The agreement should specify whether the date used is the date of the triggering event, the last day of the company’s most recent fiscal year or some other date. Using a specific date rather than the date of the triggering event discourages owners from timing their departures to maximize the buyout price. 2. Discounts & Premiums Even if a buy-sell agreement specifies a standard of value, the level of value – which can range from a controlling interest to a nonmarketable, minority interest – can have an enormous impact on the outcome. Parties to buy-sell agreements often assume that […]


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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 […]


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Challenges In Valuing Family Owned Businesses

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

  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 […]


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The reality show, “Jersey Shore,” may not interest legal professionals, yet the case of its star, Mike Sorrentino—AKA “The Situation”—may be. Among his tax fraud charges, he was accused of false documenting his imputed income through one of his companies. If you’re involved in tax fraud litigation, matrimonial actions, and shareholder or partnership disputes, advice about imputed income and its calculations is crucial. The IRS defines imputed income as the value of any benefits or services provided to an employee. The value of this cash or non-cash compensation must be considered in order to accurately reflect an individual’s taxable income. Employees can have income tax withheld for their imputed income or pay the amount due with their tax installment payments. Examples of imputed income are: Dependent care assistance exceeding the tax-free amount, Health and dental insurance for non-dependent domestic partners or same-sex partners or spouses, Basic or group life insurance in excess of $50,000, Personal use of company or employer-provided car, Non-deductible moving expense reimbursements, Educational assistance exceeding the excluded amount, and Below market rate loans. There are three approaches in determining imputed income: Detailed Transaction Listing and Analysis, Proof of luxury spending inappropriate for the claimed income, and The Net Worth Method. A Detailed Transaction Listing and Analysis consists of a listing of everything a person spends. A thorough analysis of these lists can be approached in two different ways: Adding up all the deposits to calculate after-tax earnings, and then comparing this total to the claimed earnings. List […]


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