Florida Litigation Support Services
Why do you need a Corporate Valuation?
· You are a seller and contemplating a sale
· You are a buyer contemplating a purchase
· You are an owner about to gift part of the business to heirs
· You are an owner seeking additional financing
· And of course, if a legal matter of any type requires a valuation
BUSINESS VALUATION BILLING RATES CHART
The range and variation in billing rates is extremely high, leaving a lot of room for adjustment. There’s no such thing as a “standard” hourly billing rate for a business valuation firm. By comparison, our firm billing rates are extremely reasonable – in the $95 per hour range.
|Billing Rates for Partners at Firms Providing Business Valuation Services|
|BV Partners at CPA Firms||$296||$285||$135-900|
|Large BV practices > $1MM||$382||$375||$275-900|
Business Valuation Reports
Business Valuation – we are committed to your success. Because we are also expert researchers, we write brilliant valuation reports!
What is your corporation really worth? What is a fair valuation? What type of presentation package do you need to present? We’re located in Ft. Myers, Florida but have no geographic limitations. Most of our work is done by email, fax, UPS courier and teleconferences. An excellent work product means your chance of actually going to trial is less than 5%!
In the research aspect of any valuation, we utilize online university library tools such as General OneFile, a comprehensive resource which gives us access to more than 8,000 full-text titles, more than 3,600 journals and more than 25 years of backfiles. Basically more than 100 million records at our fingertips, it is the largest collection of full-text periodicals available and highly useful in research.
We have the tools, training and resources to provide you with a package presentation and valuation that will make your corporation stand out with professionalism. M.B.A classrooms and Wall Street both use the Discounted Cash Flow (DCF) method – it is tried, proven and true.
THE ART AND SCIENCE OF VALUING CORPORATIONS – one of our typical reports has these subsections and is 50 pages in length:
- CALCULATION OF VALUE
- SCOPE OF REPORT AND STANDARD OF VALUE
- ASSUMPTIONS AND LIMITING CONDITIONS
- RATIO ANALYSIS
- REGIONAL ECONOMIC INDICATORS
- KEY ISSUES AND PROJECTED GROWTH
- U.S. ECONOMIC GROWTH
- THE DISCOUNTED CASH FLOW MODEL
- THE RISK FREE RATE
- THE EQUITY RISK PREMIUM RATE
- THE SIZE PREMIUM
- THE COMPANY SPECIFIC RISK PREMIUM
- DISCOUNTED CASH FLOW VALUATION
THE DISCOUNT RATE STUDY
I consulted an academic study which considers a fully undiversified entrepreneur as a potential buyer. Some individuals do indeed devote their entire working time plus their monetary capital to a single venture which they simultaneously own and manage. Being 100% invested in a single company, they enjoy nil diversification benefits. This equation is, again, the right one for these investors, resulting in a required return of 23.0% as is indicated.
The study is an amazing tool – it provides a rock-bottom valuation for a corporation regardless of the mix of discount rate factors applied. No matter what objections opposing counsel bring up – you have an independent academic study proving the bottom-line value of a corporation. Developing this tool required months of research and investigation. Applying it is a major chess move. It can mean the difference between success and failure for a client’s valuation.
THE DISCOUNTED CASH FLOW MODEL
Discounted Cash Flow valuation is the core tool in valuing a company used by Investment Bankers and Equity Analysts. The cost approach to valuation fails to capture many of the intangible assets for small business whereby reputation, managerial expertise, and other items do not show up on the balance sheet. The use of price multiples is often not applicable in my opinion because of the large variations of types of businesses, limited data, and the uniqueness of the business at hand.
In the basic approach to valuation known as the discounted cash flow model, the first step is to estimate free cash flows. Free cash flows consist of net operating profit, and then the non-cash expense of depreciation is added back. Discretionary expenses such as owner’s compensation and related payroll taxes are also added back. Next the appraiser discounts these cash flows to reflect the amount that a buyer is willing to pay in current dollars for the future cash flows.
The valuation involves what is known as the Build-Up Model to determine the discount rate, the rate at which the return is projected. The discount rate is a market rate. It is the rate of return required to induce an investor or buyer to commit funds to the investment, given its risk level. It has a variety of components, addressed individually in each report.
We can handle:
- Due Diligence Considerations
- Discounted Cash Flow Valuations
- Buyer Diligence
- We have expertise in Discounted Cash Flow (with more than 10 years of forensic experience). Discounted Cash Flow analysis is extensively utilized in the academic and business world, by both Venture Capitalists and Investment Bankers, as the premier method of valuation.
Currently there is no majority position in the states as to discounts for lack of marketability. The trend is that if “fair value” is the standard, then these discounts are not applied. Fair value is the nomenclature utilized as the standard for value in dissenting shareholder suits.
Delaware is a leading state in dissenting shareholder litigation. It denies minority discounts and marketability discounts. The opinions have implied that the objective of a valuation is to value the corporation itself, as distinguished from a specific fraction of shares. Therefore the Court of Chancery does not apply any additional discounts.
However, under the “fair market value” standard in the gift and estate tax domain, discounts for lack of marketability exist and are routinely applied by the Tax Court.
The U.S. Tax Court also recognizes discounts for contingent liabilities. Pending litigation can create a contingent liability. So can environmental factors. Product liability is another source. Courts seem to be open to reasonable estimation.
Another recognized discount is the Key Person Discount, which Revenue Ruling 59-60 mentions. The loss of a manager of a “one-man” business may have a depressing effect on the value of the business, particularly if there is a lack of trained personnel to succeed this individual. The IRS affirms this discount by discussing it in its book IRS Valuation Training for Appeals Officers Coursebook. Most practitioners and most courts express this discount as a percentage.
When Discounts for Lack of Marketability are applied, they are normally based on recent IPO and restricted stock studies, which cover a large collection of pre-IPO prices, versus IPO prices on the date of issuance. The difference is attributed to this discount factor. Older studies often use 25-35% discount ranges, but newer ones tend to use significantly lower ranges.
Mandelbaum v. Commissioner is the most famous case on this topic, and provides valuation experts with a 9-point list of factors with which to adjust any valuation discount study for the valuation under consideration.
DISCOUNT FOR LACK OF MARKETABILITY
Business Valuation, DLOM and Daubert (1993 decision in Daubert v. Merrell Dow Pharmaceuticals)
In Daubert, the Supreme Court demoted “general acceptance” from being the sole requirement for the admissibility of expert opinion (as it had been since 1923 under the Supreme Court ruling in Frye) to being one of several non‐exclusive indicia of the ultimate goals of relevance and reliability. The Daubert standard effectively applies in most state courts. See Faigman, et al., Modern Scientific Evidence (2nd edition, 2002).
Business valuations are a common subject of dispute in tax and divorce litigation, with the valuation consequences of private‐company status of a closely held (often family) business being especially contentious. It is not well known that core valuation methodologies such as DCF analysis have the effect of discounting the future cash flows of small businesses substantially, dollar‐for‐dollar, for lack of size alone. Because there is a strong empirical relation between size and liquidity, there is a great likelihood that any supplemental discounting for illiquidity will be redundant and entail double discounting. Accordingly, the large illiquidity discounts or DLOMs that are accepted practice in business valuation and that have been embraced may presumptively violate the Daubert requirement for reliability.
Business valuation is applied financial economics. For the most part, however, business valuations are produced by accountants for ultimate consumption by lawyers and tax authorities. Business valuations are also litigated commonly in divorce courts. Delaware Chancery Court, which adopted the Daubert standard in 1999, is influential over “fairness‐opinion” business valuations. In addition, business valuations are produced for certain accounting purposes and an independent business valuation is required to obtain an SBA guarantee for a loan used to acquire a small business.
Arguably the “Mandelbaum Factors” are not an observed study or model. In Bernard Mandelbaum v. Commissioner, the Tax Court used nine factors in determining a DLOM amount, now known as the Mandelbaum Factors. These benchmarks are:
- Financial statement analysis
- Company’s dividend policy
- The nature of the company, its history, its position in the industry, and its economic outlook
- Company’s management
- Amount of control in transferred shares
- Restrictions on transferability of stock
- Holding period for stock
- Company’s redemption policy
- Costs associated with making a public offering
There are two problems associated with these factors. First, several of these factors (e.g., financial statement analysis, nature of the company, company’s management) are typically included in the selection of discount and capitalization rates or market multiples. Therefore, these factors should have no impact on the size of the DLOM or there may be a problem with double counting. Second, some of the factors are subjective (e.g., there are no studies indicating a range of possible discounts or even a direction in the discount) and thus are open to an individual’s interpretation.
In particular, my opinion focuses on the possibility that supplemental discounting – by application of a discount for lack of marketability (or DLOM) or a discount for illiquidity – is redundant to the discounting that is embedded in core valuation methodologies.
The overarching legal standard for a business valuation is “fair market value.” In spirit, this is the amount a property would sell for on the open market if put up for sale. The Supreme Court has defined fair market value as the price at which an asset “would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” The “no compulsion” part of this definition is relevant to my thesis, as any discount in value for a lack of immediacy presumes at least impatience, if not a compulsion to sell quickly. Similarly, the overarching economic standard for a business valuation is market value if that is observable and, secondarily, a discounted cash flow (DCF) valuation. Valuation multiples for like public companies would rank third in a pantheon of methods. A valuation multiple is a ratio that denominates the market value of a business per dollar of an accounting metric such as sales revenue, earnings or EBITDA (which stands for earnings before interest, taxes, depreciation and amortization).
The best rationale for a discount in the context of a business valuation is that investors demand one because they occasionally face an immediate need for cash. A dubious rationale for a discount is that illiquidity or lack of marketability may force an investor to hold and thereby miss an opportunity to sell and avoid a loss. This rationale is dubious because it rests on an assumption of foresight, as foresight is required for any sale in advance of a loss.
Discounts of 25% or more have been applied in business valuation, so the DLOM and discounts for illiquidity matter. David Laro, a Senior Judge on the United States Tax Court, reports that: “The discount for lack of marketability is the largest single issue in most disputes regarding the valuation of businesses and business interests, especially in tax matters. This is true both in the number of cases in which the issue arises and the magnitude of the differential dollars involved in the disputes.”
Judges have been receptive to supplemental discounts in valuations of private companies because, as between two otherwise equivalent companies, one public and one private, the shares of the public company surely must have greater value. The closest evidentiary counterpart to this intuition is a discount (of approximately 6%) based on average flotation costs.
Conclusions as to the DLOM
Core business‐valuation methodologies have the effect of discounting the future net cash flows of smaller businesses substantially for lack of size. Because there is a high correlation between size and liquidity, there is a great likelihood that supplemental discounting for lack of liquidity or lack of marketability will be redundant. That there are multiple labels or even multiple valid rationales for discounting does not justify double discounting. Despite Daubert and despite being obviously improper, redundant discounting has come to be accepted practice in business valuation and been accepted (accordingly) by many.
Overall, when supplemental discounts are calculated properly they are small enough to be disappearing in the margin of error of the analysis. Accordingly, contentious expert disputes over the appropriate magnitude of the illiquidity discount, DLOM, blockage discount or control discount/premium to apply to the results of the core business‐ valuation methodology can be a waste of judicial attention.
However, I would apply after due consideration one additional discount – that for real estate brokerage costs and legal fees in the case of a sale. A reasonable estimated percentage for the total of these deductions would be a 10% factor.
Valuing Art for Tax Purposes
Beauty is in the eye of the beholder
Artwork valuations are reviewed by the IRS’ Office of Art Appraisal Services and may be referred to the Commissioner’s Art Advisory Panel. The Art Advisory Panel assists the IRS by reviewing and evaluating valuations submitted in support of the fair market value claimed for works of art involved in income, estate and gift tax cases.
The methodology is an investigation of pertinent cases, some of which are listed below, and an analysis of those cases as they pertain to the facts of the case at issue. These projects involve in-depth research and a formal written report. Investigations support discounts, whether for contingent liabilities or other reasons, along with factual underpinnings. Depending on the dates valued, the interest may be discounted for lack of marketability and the contingent liability discount. As well, a blockage discount in art is borrowed from business valuation. It is a reduction in value when similar items are presented for sale simultaneously. In total these can amount to major discounts.
Valuators studying art valuations must be familiar at a minimum with the following cases…
- Estate of Klaus v Commissioner
- Kapp v Kapp
- Collier v Collier
- Payne v Commissioner
- Estate of Mitchell v Commissioner
- Estate of Desmond v Commissioner
- Dickerson v Commissioner
- Estate of Deputy v Commissioner
- Estate of David Smith v Commissioner
- RJE Corporation v Northville Industries Corporation
- Estate of Georgia T. O’Keeffe v Commissioner
- Estate of Adams v Commissioner
While the “old masters” continue to have an orderly increase in value, many contemporary prints and paintings have fallen to less than half their value from previous years, with the current auction market having also lost 30% or more of its sales volume (more pieces are being left unsold at the auction block).
It’s not uncommon for a taxpayer and the IRS to disagree whether an artwork is genuine. In George O. Doherty and Emelia A. Doherty v. Commissioner, 16 F.3d 338 (9th Cir., 1994), two of the foremost authorities on the paintings of Charles M. Russell could not resolve the question of authenticity of a donated painting.
Clear title is another concern – owners have unintentionally purchased stolen artworks when they have purchased from non-gallery sources. The investigation of provenance is an important issue.
Blockage discounts. The concept of a blockage discount in art is part of business valuation nomenclature and practice. As far back as 1975, the estate of artist David Smith, which included 400 sculptures, was allowed after a convincing presentation an agreed-upon discount by the Tax Court of 37%. The thinking was that if all of his works were presented for sale simultaneously, an automatic devaluation would occur due to a lack of enough buyers ready and willing to pay full price.
An informed opinion and due diligence, the consequences of a complete narrative report, is the solution in cases involving the valuation of art holdings.
CORPORATE VALUATION SERVICES
We can produce a Discounted Cash Flow Analysis which shows you what the corporation is really worth! We operate on a Retainer Basis and find that our valuations are priced well below the national average.
Practical valuation ‘handbooks’ such as Copeland, Koller, and Murrin maintain that cash flows outperform accounting earnings for valuation purposes and thus advocate the DCF model. This is an essential tool you need today whether you are a Buyer or Seller.
Copeland, T., Koller, T., & Murrin, J. Valuation: Measuring and Managing the Value of Companies. Millennium edition: John Wiley & Sons, Inc.
What is a professional valuation worth to you? Whether you are a buyer or seller it is an essential step. If the value of the entity is in question, in litigation, it must be valued.
To gain and maintain initiative is based on the military’s commander ability to make quick and knowledgeable decisions. The 19th Century military philosopher, Carl von Clausewitz, calls this quick recognition of the truth the commander’s coup d’oeil, or intuition. It is the ability to recognize the truth, or a high level of awareness, “that the mind would ordinarily miss or would perceive only after long study and reflection.”
When it’s time to call a Forensic Accountant:
- Civil and Divorce Litigation Support
- Criminal Litigation Support
- Forensic Accounting Reports
- Special Projects for the Court
- Valuation (e.g. closely held businesses)
- Business Interruption and Lost Profits
- Preparing Financial Deposition Questions
- Analyzing a Competing Expert Witness Report
- Wrongful Death Valuation Computations
- Defined Benefit Pension Valuations
- Defined Contribution (i.e. 401k) Marital Valuations
- Valuation analyses
- Valuation report reviews
- Comprehensive valuation reports
- Expert testimony
- Arbitration valuations
- Gift and estate tax valuations
- Damage action valuations
- Marital dissolution valuations
- Personal vs. Enterprise Goodwill Computations
- Discounted Free Cash Flow Valuation Techniques
I have authored “Protecting Your Company”, “Research for Writers”, and a large variety of White Papers on forensic issues. I have handled anti-fraud controls and forensics for a family on Jupiter Island, Florida and been involved in valuation proceedings on both the levels of corporate sales and arbitration. For the last ten years I have handled fraud and investigative auditing for Fortune 1000 Company clients. Recent valuation assignments have included restaurants, HVAC contractors, furniture installers, contractors, online retailers, and a Keys Dive Center, among others.
Contact me today at Jerry@capecoraltaxaccountants.com for my firm brochure and CV.
I operate in all parts of Florida and the Southeast, including South Florida, Southwest Florida, Central Florida, St. Petersburg and Tampa as well as the Orlando area.