I have read too many buy-sell agreements to count. The typical valuation process in them (for appraisals following trigger events) range from 150 words to perhaps 300-400 words. That simply is not enough “wordage” to describe or define any valuation process, much less an appraisal. I started focusing on the seven defining elements over the years as I experienced problems with each and every one of them in troubled or litigated valuation processes where I was either an appraiser or a consultant. Do your clients’ buy-sell agreements adequately define the seven elements? Or does your company’s agreement do the same? If they are not clear in an agreement, future trouble is almost certainly lurking.
The standard of value of fair market value is very familiar to attorneys and appraisers and often the subject of apparent disagreement. This post looks at the standard definition of fair market value and then breaks it down into its component parts as they relate to hypothetical willing buyers and sellers. Fair market value occurs at the intersection of negotiations between these two sets of hypothetical parties. First, we must understand the meaning of fair market value. Next, we must ask the follow-up question: the fair market value of what? We investigate the relationship of the definition of fair market value and the asset(s) to which the definition pertains.
What adjustments are necessary to appropriately value a company? We normalize for non-recurring and unusual items and for discretionary expenses of owners. These are necessary to achieve marketable minority/financial control value. Then, if strategic control is desired, we adjust cash flows for synergistic or strategic cash flow benefits. It is important to understand the critical differences between normalizing and control adjustments.
At the core of every business valuation, whether of an entire business or an interest in a business, lie three key elements that must be examined and understood. This is true regardless of the seeming complexity or simplicity of any valuation situation. The elements are expectations for cash flow, the expected growth in cash flow, and the risks associated with achieving the cash flow. In this short video post, we Keep It Simple, Sally or Stewart and will elaborate on the concepts in the near future.
While I have always focused on trying to make presentations for judges as understandable as possible, I have been thinking about this topic a good bit during the past year. By the time the year is over, I will have spoken on this topic of simplifying complex financial information for judges and juries a number of times around the country. Sometimes, it is a single graphic that helps convey the reasonableness of a complex series of opinions. This post is about one such graphic.
The issue of a premium for an S corporation at the enterprise level has been tried in a tax case, and the conclusion is none. This case marks a virtually complete valuation victory for the taxpayer. It also marks a threshold in the exhausting controversy over tax-affecting tax pass-through entities and applying artificial S corporation premiums when appraising S corporations (or other pass-through entities). This post provides an extensive review of the case.
How should an expert explain the basics of valuation to a judge or a jury or a business owner or an attorney who needs to understand something about value for court, for personal reasons, or for clients? This post provides seven ideas to discuss the essence of business valuation in terms that have proven successful for me.
Peter Mahler of New York Business Divorce Blog wrote a post today titled “Disclosure of Estate Tax Stock Appraisals in Shareholder Disputes.” The question addressed is if or whether, in the context of contested stock valuation procedures stemming from elections to purchase in statutory dissolution or dissenting shareholder cases, pre-litigation appraisals rendered for estate tax purposes (or other purposes) should be discoverable. That’s a good question. In this post, I’ll comment briefly as a business appraiser and businessman.