How Has the Economic Downturn Affected You? The economic downtown had an adverse effect on each of the client companies surveyed. A service-based company reported that business activity declined by about 25% in 2009, year-over-year. The company’s president noted that … Continued
The Internal Revenue Service’s Revenue Ruling 59-60, which provides guidelines for valuation of closely-held companies, presents a working definition of fair market value: 2.2 Section 20.2031-1(b) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and … Continued
Business appraisal is both an art and a science, and Revenue Ruling 59-60 reinforces this point upon a full reading of the complete document.
The valuation professionals at Mercer Capital have the depth of knowledge and breadth of experience necessary to help you navigate the potentially perilous path of Section 409A.
In the world of FASB, goodwill is not delineated into personal goodwill and corporate or enterprise goodwill. However, in the tax world, this distinction can be of critical importance and can create significant savings to a taxpayer involved in the … Continued
The Tax Court opinion regarding the Estate of Thompson vs. the Internal Revenue Service (T.C. Memo 2004-174) is remarkable in that the full opinion is essentially a business valuation analysis. The 54 page decision report includes approximately 18 pages of … Continued
We have previously discussed the concepts of normalizing adjustments and control adjustments to the income statement. Developing an understanding of these important adjustments that are made to the income stream is crucial in the process of conducting an appraisal – … Continued
Normalizing adjustments adjust the income statement of a private company to show the prospective purchaser the return from normal operations of the business and reveal a “public equivalent” income stream.
Phantom stock is sometimes more “phantom” than valuation and accounting professionals would like. Small business owners may make phantom stock agreements with key employees, but fail to mention these agreements to their financial advisors, particularly, but not exclusively, when the … Continued
BASIC ASSUMPTIONS REVIEW EVA, and the related concept of economic profit, suggests that maximizing the differential between a firm’s incremental investments and its cost of capital will maximize shareholder wealth. Mathematically, we will show that this boils down to maximizing … Continued
INTRODUCTION Everyone knows what Economic Value Added is or maybe this term that has been talked about and written about so much is not so well-understood. In this issue of E-Law and the next, we will discuss Economic Value Added … Continued
During the formative years of my business valuation career, I gradually became aware that consideration of six underlying financial, economic, logical, and psychological principles provide a solid basis for considering valuation questions and issues. The acronym, GRAPES, provides a convenient word to help organize and remember the Organizing Principles, which we will sometimes refer to here (with a tip of the hat to John Steinbeck) as the GRAPES of Value.
A critical aspect of any valuation analysis is the appraiser’s ability to read, understand and interpret a Company’s financial statements – a skill vital to making an accurate assessment of the value of any company.
Concentrations are a significant issue in valuing a business enterprise. The presence and magnitude (or absence) of business concentrations are major considerations in assessing a subject company’s risk profile and financial outlook.
This case is a present interest victory for the taxpayer.
Promissory notes are used frequently as a funding mechanism when buy-sell agreements are triggered. However, most buy-sell agreements reflect very little thought or negotiation regarding the promissory notes that they contain.
Booth Computers, a New Jersey family partnership was created in 1976, and in 1978, a related partnership, HCMJ Realty Ltd. was formed, of which Booth was a limited partner. Interests in Booth were given to James, Michael and Claudia Cohen by their father, Robert. A 2011 case tells the story of how the Cohen children obtained their interests, and how Booth and at least one related partnership of which Booth was a limited partner, acquired substantial assets.
Most business owners do not have a current understanding of the details and potential pitfalls that lurk within their own buy-sell agreements. Most view these agreements as obligatory legal documents that can be forgotten about until needed. Unfortunately, when a buy-sell agreement is needed it is too late to fix any problems within the agreement.
Process buy-sell agreements are buy-sell agreements involving the use of one or more business appraisers in processes specified for determining value. Mercer Capital professionals have been involved in many valuation processes for determining price (valuations) for buy-sell agreements.
Many buy-sell agreement templates call for an appraisal process to resolve the price (i.e., the valuation) for transactions under companies’ agreements upon the occurrence of specified trigger events. We call such agreements process agreements. Quite often, the descriptions of the valuation processes are quite short.
The best time to think about what happens if the business or the relationship between the business owners doesn’t work out is when the business is being formed and business owners are happy.
Several other issues related to valuation should appropriately be addressed in your buy-sell agreements. The following discussion is by no means exhaustive, but includes items that are helpful in minimizing problems or uncertainties with the operation of process buy-sell agreements.
The interests of shareholders (or former shareholders) and corporations (and remaining shareholders) often diverge when buy-sell agreements are triggered.
Many buy-sell agreements are funded, in whole or in part, by life insurance on the lives of individual shareholders, who may be key managers, as well. Life insurance is a tidy solution for funding when it is available and affordable. It is important, however, to think through the implications of life insurance from a valuation perspective whether you are a valuation expert, a business owner or both.