Asking the right questions and obtaining clarification up front can help business owners, attorneys and other interested parties get the most from a business valuation expert’s expertise and avoid costly mistakes. This article suggests several points to investigate when engaging a business valuation expert, including their credentials and professional experience as well as their ability to explain the appropriate standard of value and the valuation’s purpose. The article states that the more clients understand about the valuation process, the better able they will be to ask the right questions.
Business valuation experts can’t always accept the subject company’s financial statements at face value. Sometimes adjustments are needed before an expert can use the financial statements to value a business. This article provides three common types of adjustments and explains when each one might be relevant.
Under U.S. Generally Accepted Accounting Principles (GAAP), two new accounting rules on revenue recognition and leases will soon go into effect for public companies. (Private companies get an extra year’s reprieve.) This article explains that these changes could have a major impact on how business valuation professionals evaluate financial statements, apply pricing multiples and estimate a company’s cost of capital.
Business valuation professionals must decide whether shareholder loans are bona fide debt obligations, a type of equity transaction or a hybrid of the two. Debt vs. equity classification has relevance when valuing a business, as well as in divorce cases. This article explains why the distinction matters and what factors the IRS considers when deciding what qualifies as a bona fide loan.
In re Appraisal of PetSmart, Inc., Delaware Ch., C.A. No. 10782-VCS, May 26, 2017
The Tax Cuts and Jobs Act (TCJA) is the biggest change to the tax law in over 30 years. This article explains why it’s important to consider 1) how tax reform will specifically affect the subject company’s cash flow, 2) how management plans to use any tax savings, and 3) whether management’s projections seem reasonable. A sidebar explains how the new law could also affect a company’s tax base (the amount to which new, lower tax rates will be applied).
Business valuation experts often help formulate settlement offers in divorce cases. This article highlights provisions of the Tax Cuts and Jobs Act (TCJA) that could affect divorce settlements, including elimination of the deduction for alimony payments, restricted deductions for state and local taxes, expanded uses of Section 529 education plans and reductions in business tax rates. A sidebar defines alimony under the tax rules that will apply through 2018.
Future earnings drive business value under the income approach. This article compares and contrasts two methods that fall under this approach: the discounted cash flow and capitalization of earnings methods. A sidebar explains what terminal value is — and how to calculate it.
In appraisal rights claims, the price paid in a merger may not represent “fair value,” especially when the deal involves related parties. This article summarizes a recent Delaware Chancery Court case, where the judge concluded that a deal price is only as reliable as the process that was used to negotiate the transaction. In the absence of a “competitive and fair auction,” the court will rely on other business valuation methods instead.
John Douglas Dunmire v. Farmers & Merchants Bancorp of Western Pennsylvania, Inc., 2016 Del. Ch., C.A. No. 10589-CB, Nov. 10, 2016
Often, business valuations are based on estimates of expected cash flow, but it’s important to evaluate whether these estimates seem reasonable. This article explains the role that cash flow estimates play in valuing a business and the difference between forecasts and projections.
The use of a joint business valuation expert can often save resources — if the parties will openly share information and trust each other. This article outlines the benefits of using a joint expert. But it acknowledges that joint experts might not be realistic in all situations, including contentious divorces and shareholder disputes.