Using Forensic Accounting Skills to Your Advantage When valuing a business, one essential step in the process is to review and analyze the subject company’s historical financial information. This information allows a business valuator to analyze the company’s past performance and pinpoint trends in the business to forecast its future performance. The author in this article shares his opinion regarding items that a business valuator may encounter in an engagement that merit normalization. When valuing a business, one essential step in the process is to review and analyze the subject company’s historical financial information. This information allows a business valuator…
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Ensuring Accurate Valuations with Real-World Testing One of the key assumptions valuation professionals must make is about a company’s capital structure. This article explores factors valuation professionals should consider as they arrive at the debt and equity used to value the entity. Business valuation and financial modeling involve navigating a wide range of assumptions, and for the resulting values produced by these models to be truly meaningful, these assumptions need to be well-grounded. One of the key assumptions valuation professionals must make is about a company’s capital structure. This term refers to the specific mix of debt and equity a…
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A Forensic Investigation Opens IRS-Floodgate! In this article, the author critiques the IRS Participant Guide for Marijuana Companies. This 200-page guide provides general instructions to the service on the valuation of cannabis farms. The author argues that the compliance guide is completely inaccurate concerning the audit of cannabis cultivation. The author proposes that forensic and valuation professionals employ a series of tests in lieu of the IRS guidance. William Fowler, a former IRS Large Case Exam Officer, agrees with renowned attorney, Nick Richards of Greenspoon Marder, that the general suggestions of the IRS pertaining to its Cannabis Compliance Initiative is…
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Awaiting Proposed ESOP Regulations In April of this year, the author wrote “Adequate Consideration” Defined? for QuickRead. Since then, the author has regularly checked for updates from the Department of Labor (DOL) with respect to the definition of adequate consideration as it pertains to section 408(e) of the Employee Retirement Income Security Act of 1974 and employee stock ownership plans. Although there have not been any regulatory updates from the DOL (as it pertains to the definition of adequate consideration), there is some news on the topic to share. In April of this year, I wrote “Adequate Consideration” Defined? for…
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The Maggard v. Commissioner Tax Court Opinion S Corporations are required to have one class of stock. In this article, the author discusses the recent Maggard v. Commissioner U.S. Tax Court opinion and addresses whether a disproportionate distribution violates the one class of stock requirement. In any financial analysis of a company, we must consider potential tax liabilities. Since many small businesses operate as S corporations, the possibility of their S status being terminated retroactively can be a major concern. One potential way to intentionally or unintentionally terminate S status is to violate the requirement that the company have only…
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A Series on Managing Uncertainty and Fear The author has testified hundreds of times. Through these experiences, he has gained insight that is not written in the books, or at least not the ones he has been reading as a forensic and valuation professional. In this article, he shares additional insight on what is demanded by expert witnesses. As of the date of this writing, I have testified hundreds of times. Through these experiences, I have gained insight that is not written in the books, or at least not the ones I have been reading as a forensic and valuation…
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In the Analysis of Personal Goodwill In the sale of a C corporation in an asset deal, the sellers may argue that a portion of the purchase price is for personal goodwill so that the proceeds are not subject to double taxation. In the context of divorce, personal goodwill may not be a divisible asset, while enterprise goodwill is. This article discusses the quantification of personal and enterprise goodwill using the multi-attribute utility model (MUM). A key consideration in both the sale of closely held C corporations and valuations for marital dissolution purposes involves the existence and value of personal…
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Use in Private-Business Valuation (Part IV) In this fourth article, the authors show how to apply the IPCPL theory using public market cost of capital. Read Part I, Part II, and Part III Application of IPCPL Theory When Bob Dohmeyer, Pete Butler, and Rod Burkert published their article on the IPCPL in 2013, they developed a discount rate from the Deal Stats database. In 2015, we published an article in which we set forth that their incite that the difference between the cost of capital in a public market and private market is largely due to the difference in transaction…
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Empirical Evidence Supporting IPCPL Theory (Part III) In this third article, the authors present the empirical evidence supporting use of the IPCPL theory. In the second article in this series, it was shown that the general empirical implications of implied private company pricing line (IPCPL) theory are that buyers of privately owned businesses pay higher transaction costs in exchange for higher returns on their investments. The IPCPL theory treats transaction costs (TC) as a proportion or percentage of transaction price (P) stated as a decreasing convex function of P. (The higher the price, the lower the percentage transactions costs are…
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A Principle-Driven Framework to Standard Setting This 17th article of the unimpeachable neutrality series will attempt to elevate your understanding of standards beyond mere compliance and foster a world rich in principle-driven actions. In a world increasingly governed by complex standards and regulatory landscapes, the craft of creating standards that stand the test of time has never been more crucial. Just as it is insufficient to teach a child not to murder merely because it is illegal, effective parenting also nurtures a respect for life and the well-being of others that transcends legal mandates. This approach parallels the essence of…
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Navigating Bias in Business Valuations Valuation analysts are tasked with gathering information, analyzing data, summarizing findings, and communicating the results. This includes quantifying the expected cash flows and risks of the business through often conflicting and misrepresented information. This article provides an overview of bias, how it affects business valuations, and provides readers with the standards and tools they need to confidently support their opinions when challenged. Introduction “When the facts change, I change my mind. What do you do?” – Sir John Maynard Keynes Our waking hours are bombarded with more information than can be absorbed. From 2009 to…
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Is There a Need to Broaden Regulation? Can humans achieve economic market efficiency without the “visible hand” or is the collateral damage of decisions an unfortunate reality in exchange for the freedom of unregulated markets. This article discusses the role of regulation in an unregulated market and potential shifts. How do you measure ability when the parameters are not clearly defined? As valuation analysts, we determine the cost of capital using inputs such as return on regulated public markets. Restrictions of public securities markets are often set in place through governmental bodies which impose arguable economic checks and balances. The…
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A Key Formula Used in Business Valuation Net working capital is a crucial component of business valuation since it impacts both a company’s enterprise value via its projected cash flows and its equity value via excess or deficient net working capital levels as of the valuation date. In addition, net working capital for valuation purposes is more nuanced than simply taking current assets minus current liabilities, as is often done when calculating net working capital in an accounting context. This article discusses what is net working capital and why it is important to value a business. When valuing a business,…
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The Principles of Conservatism in Action Most business owners understand the industry in which they operate and tend to be good at running the day-to-day operations. Yet, that does not mean they have made optimal decisions or that they have the necessary controls and financials in place that enable them to make sound financial decisions. Companies that do not keep high quality data will likely have a lower value. This article focuses on the data problems with the valuation of a sawmill that I recently completed; minor facts and circumstances have been altered to preserve client anonymity. Most business owners…
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Consider the SLAT and GRAT in Gift Planning Understanding gift tax regulations is crucial for individuals and their advisors because it impacts estate planning strategies and can significantly affect the overall tax liability. Properly utilizing exemptions and understanding the rules surrounding gift taxation can help individuals minimize their tax burden and ensure a smooth transfer of assets to their intended beneficiaries. This article discusses the availability of the SLAT and GRAT gifting techniques. Understanding gift tax regulations is crucial for individuals and their advisors because it impacts estate planning strategies and can significantly affect the overall tax liability. Properly utilizing…
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A Practice Guide for Practitioners What are the proper questions and approaches that enable valuation professionals to value non-fungible tokens (NFTs)? The author describes the questions and methods used to value NFTs. With the recent IRS proposal, the focus on fair market value is repeated as the preferred method for cryptocurrency transactions that do not involve cash.[1] The IRS redefines fair market value to simply market value for cryptocurrencies traded on an exchange; this limits the applicability to less than 10% of cryptocurrencies and highlights the need for practitioners to understand how to apply fair market value calculations to cryptocurrency.…
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A Legislative Approach? In April of 2023, the United States Department of Labor (DOL) committed to move forward with a regulation to clearly detail “adequate consideration” in section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA). For decades the DOL has utilized litigation versus heeding Congress’s edict to enact regulations regarding adequate consideration and it seems as though action is going to finally be taken. This article discusses recent developments suggesting a change in their approach. In April of 2023, the United States Department of Labor (DOL) committed to move forward with a regulation to clearly detail…
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How AI is Transforming the Industry Artificial Intelligence (AI) represents a paradigm shift in the realm of computational capabilities, transcending traditional boundaries of machine functionality to emulate human-like intelligence. AI has made remarkable advances in recent years due to the availability of massive amounts of data, powerful computing resources, and innovations in methods and architectures. This article will explore the role and impact of AI in valuation and forensic accounting, addressing the challenges and issues with AI, and ensuring quality control in using AI. Introduction to AI in Business Valuation and Forensic Accounting Artificial Intelligence (AI) represents a paradigm shift…
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Factors to Arrive at a Value that are Beyond the Three Approaches This article addresses valuations for buy/sell transactions with private buyers and private sellers. A business owner calls and says: I want to sell my business. Can you tell me what it’s worth? Thousands of these transactions are occurring daily. But before you go any further, stop and ask more questions. As business valuators, we are conditioned to crank out conclusions of value based on a pre-set series of steps like the hitch-hiker’s guide to the galaxy; the meaning of life, the universe, and everything is 42! But what…
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A Process to “Right” the Company Often later-stage, venture-backed companies (“late-stage start-ups”) seek advice as they find themselves languishing in the neverland between being heavy on intellectual property (IP) assets and light on commercial products or services. Typically, we are contacted by an investor or board member who has become fatigued by management’s assertions that ultimate success is ‘just around the corner,’ only to see the company repeatedly fail to achieve important milestones. The board of directors and capital sources have begun to lose confidence in management and want to get R.E.A.L. about the company’s status and prospects. Introduction Often…