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 […]
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Proposed Changes to IRC Section 2704
Posted in Business Valuation, on Oct 2016, By: Mark S. Gottlieb
ShareDetecting Financial Statement Fraud
Posted in Financial Advisory, on Sep 2016, By: Mark S. Gottlieb
ShareRecently, 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 […]
Weighting Different Methods To Determine Value
Posted in Business Valuation, on Sep 2016, By: Mark S. Gottlieb
ShareUnity 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
Share(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 […]
A Business Valuation Analysis Can Help Increase the Value of Your Business
Posted in Business Valuation, on Apr 2016, By: Mark S. Gottlieb
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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. […]
Dealing with Fraud: A Simple Four Step System
Posted in Financial Advisory, on Apr 2016, By: Mark S. Gottlieb
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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 […]
Valuing Covenants Not to Compete
Posted in Business Valuation, on Feb 2016, By: Mark S. Gottlieb
ShareThe 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 […]
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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 […]

When the CEO of Continental Resources, Harold Hamm, divorced from his wife, Forbes published an article about the possible tax consequences. The settlement ordered Hamm to pay his former wife $995.5 million. Forbes asked the obvious question: with this kind of hefty transaction, the tax man must surely get his share, right? Not quite. According to law, transfers of property between spouses during a divorce are virtually tax free. Good news for the Hamms. However, there are often unseen tax burdens later on. Code § 1041 of the U.S. Internal Revenue Code lays out the rules for the taxation of marital property when it is transferred between spouses. Within the code, the “General Rule” states: “No gain or loss shall be recognized on a transfer of property” between spouses or former spouses. One can assume that during a matrimonial case, there are no worries over taxes involved in transferring property. In many cases, this is true. But there are some important things to consider before dividing marital assets. Below is an outline of some of the major issues that may cause tax consequences. For a more in-depth discussion of these issues, please follow the link at the bottom of this post to read our whitepaper. Carryover Basis Carryover basis is a method used to determine the tax basis of an asset when it has been transferred from one individual to another. In a divorce, the spouse that receives an asset also takes the carryover basis of the asset. Because the […]