(Part I of III) This article about excess compensation is comprised of three-parts. Part one summarizes the facts regarding Clary Hood, Inc. v. Commissioner and the U.S. Tax Court’s holding. Part two of this series describes the Tax Court’s analysis and conclusions regarding the reasonableness of compensation issues. Part three describes the Tax Court’s analysis and conclusions regarding Section 6662 penalty issues. Introduction There are many reasons why valuation analysts and other professional advisers are asked to analyze—and opine on—the reasonableness of the amount of compensation paid to the employees of a private company or institution. Assessing the reasonableness of…
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FTC Proposes Rule to Ban Non-Competes On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) that, if adopted, would functionally serve as a complete ban on non-compete clauses and contractual provisions or employment policies that have a similar effect with limited exception. The 60-day comment period runs through March 7, 2023. On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) that, if adopted, would functionally serve as a complete ban on non-compete clauses and contractual provisions or employment policies that have a similar effect with limited…
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Their Changing Roles and Responsibilities The Frye and Daubert decisions shook the legal world and the standards enunciated also shook the valuation world. In this article, the author shares some recent Maryland developments and surmises that there may be more changes coming that will affect the role of lawyers, judges and experts. In my 30 years as a Judge on three different Maryland Trial Courts and the last 16 years as a Senior Judge serving on two of those Trial Courts and one appellate Court conducting ADR, I have observed and experienced the changing roles of lawyers, judges, and experts…
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An Additional Consideration for Business Valuation and Forensic Accountants When Valuing a Company The Biometric Information Privacy Act (BIPA), 740 Ill. Comp. Stat. 14/1 et seq., is not just for Google and Facebook. While the technology giants have been sued for allegedly violating BIPA, so too have countless other companies. In the last few years, plaintiffs have sued hundreds, if not thousands, of companies across a range of industries for alleged violations of BIPA. The author discusses BIPA, liability that companies are exposed to for violating BIPA, and questions valuation analysts and forensic accountants must ascertain a company’s exposure to…
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It is all Based on Your Perspective The purchase price of a transaction can look vastly different. Therefore, when considering the prices of various transactions, it is important to know how those prices have been calculated so that one has a consistent perspective and is not comparing apples to oranges This article illustrates the various perspectives that may emerge in connection with a purchase price. With football playoff season on the horizon, I cannot help but think about September 24, 2013—a night that many football fans will not soon forget. The Seattle Seahawks were playing the Green Bay Packers on…
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VPS StraightTalk Webinar, October 20, 2022 This summer and fall 2022, within the business valuation profession, one of the most contentious issues has been “which cost of capital should business valuation professionals use when valuing a small business?” First, Dr. Damodaran advocated the implied equity risk premium with the capital asset pricing model without adding a size premium or company specific risk. He adjusts for other risk factors (size and company specific risks) by adjusting the forecasted cash flows. Next, James Hitchner, CPA, ABV, CFF, responded to Dr. Damodaran’s criticism. Shortly thereafter, Eric Nath, founder of Eri Nath & Associates,…
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Where to Start? In forensic accounting, whether litigation is contemplated or not, the key to the most reliable conclusion is starting with accurate and complete information. Under the best of circumstances, the primary source of this information is your client. On the other hand, when the person or entity you are requesting from is an adversary, there is little incentive for cooperation. Regardless of the side one is on, this article summarizes the various means of finding assets. In forensic accounting, whether litigation is contemplated or not, the key to the most reliable conclusion is starting with accurate and complete…
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Answer These Five Questions How do you know if social networking will work for you? If you are using social media and not getting results, are you wasting precious time? If you are not using social media, are you missing out on a gaping opportunity? The author of this article has invested about 16 years on LinkedIn and about five years on YouTube. Based on what he has done and the results he has achieved in those years, here are five questions he raises that can answer if social networking will work for you … and whether you should make…
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Is Bankruptcy the Next Stop and is a “Fresh Start” Available for Amber Heard? The well-publicized defamation case of Johnny Depp and Amber Heard resulted in a substantial judgment against Heard. Setting off the amount awarded to Depp, Heard will be liable for approximately $8 million in compensatory and punitive damages. If Heard files for relief under bankruptcy law, is that judgment dischargeable? What can Johnny Depp do if that arises to protect his interest? This article discusses substantive issues that may arise if that were to occur. A fundamental concept of American bankruptcy law is to provide a “fresh…
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Using Weights and Factors to Quantify Risk This is a condensation of the author’s article, originally published in The Value Examiner, July/August 2022. The author proposes an alternative way of calculating the company specific risk premium. This is a condensation of my article originally published in The Value Examiner, July/August 2022. Most of us who value businesses are not valuing businesses in the middle market or the size of businesses that the major writers and instructors on business valuation are valuing. We generally value businesses with revenues under $3,000,000, if not $1,000,000. Not only is there a substantial difference between…
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A Five-Step Process to Secure Debt Refinancing For anyone dealing with a company that has a troubled balance sheet, maintaining cash flow is critical to determining an optimal go-forward approach. In many cases, the go-forward involves a transaction such as a merger or sale. But, to get to that point, a stressed or distressed company must maintain the liquidity it needs to continue running the business while positioning itself to satisfy its debts—often to a primary lender—and proceed with the intended transaction. Preparing your company for non-traditional debt financing is a lot like online dating. You need to like what…
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How the PTE Tax Can Impact the Valuation of Pass-Through Entities This paper explains how the PTE tax in Massachusetts and several other states affects the valuation of a business and how business owners can account for this tax to avoid double taxation. Introduction Taxes can have a significant impact on the value of a business. Pass-through entities such as S-Corporations and partnerships generally do not pay any taxes since the income is passed through to the individual shareholder or partner. Taxes are then paid on their individual income tax returns. But what if I said that Massachusetts pass-through entities…
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November 2022 The importance of consumer protection laws can seem unfathomable when you see a label on a sweater reminding you to remove the child before laundering, but laws prohibiting deceptive trade practices and false advertising exist because the incentives to run roughshod over consumers are significant. Since the individual harm resulting from consumer fraud is often small, those laws often provide for statutory damages to give consumers an incentive to pursue their claims and for producers to refrain from defrauding customers. For businesses selling and promoting their products nationally, statutory damages can mount quickly. This article discusses Monera v.…
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On Business Valuation The effects of inflation on consumers’ spending and psyche are well-known. The difficulties each causes in day-to-day life are often discussed. Inflation has affected everything from the cost of transportation to the cost of food and housing. What is less discussed, however, is how the current inflationary period is affecting small business owners and their companies. In this article the author shares his impression. U.S. Inflation Calculated annually, the U.S. Inflation Rate reflects the average percentage by which the price of a specific basket of goods and services purchased in the United States has increased. The U.S.…
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Alleged Best Practices to Whom? Peter J. Butler, CFA, ASA, MBA, founder of Valtrend, LLC and inventor of the Total Cost of Equity Calculator (TCOE), responds to comments made by Robert Reilly and Connor Thurman regarding best practices used to arrive at the company specific risk; the latter article did not discuss the TCOE and here he “key[s] in on Part III—the section which addresses empirical evidence in the selection of the company specific risk premium (CSRP)” and merits of the TCOE. Introduction I read all four parts of the “Best Practices for Estimating the Company-Specific Risk Premium” in NACVA’s…
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It is that time of the year when we take stock of what we accomplished, what we did not, and plan for next year. But chances are, you may be too focused on tasks you can check off when they are done and not the big picture goals or where they are leading you towards—or not. This article discusses the importance of taking-in the big picture—the goals, strategies, and tactics—as one develops and/or reviews the marketing strategy. It is that time of the year when we take stock of what we accomplished, what we did not, and plan for next…
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A Review of the Basics for Lost Profits (Part III) This is the third installment of this series. The first part provided an overall introduction to this review of the basics for lost profits. The second part reviewed the similarities and differences between estimating lost profits and litigious based business valuations. This installment takes a deeper look into the methods for calculating lost profits. Four methods based on the “but for” theory are examined. The discussion of each methodology highlights the approaches taken for calculating lost profits and weaknesses or concerns that arise with each method. Read Part I Here…
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The Consistency of Data and Trends The real estate sector encompasses a variety of activities, limited only by the imagination, including: selling, leasing, management, development, appraisal, title services, and investment. When valuing businesses linked to the real estate market, whether directly or indirectly, it is essential to examine both the risk and the cash flow generating ability of each company. The co-authors of this article share essential aspects appraisers must consider in these valuation engagements. The real estate sector encompasses a variety of activities, limited only by the imagination, including: selling, leasing, management, development, appraisal, title services, and investment. When…
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Taking Another Look at Perpetrators and Their Schemes—Can a Testifying Expert Witness Rely on the Financial Statements and/or Other Financial Reports Provided? For more than a decade, the Association of Certified Fraud Examiners (ACFE) has published its report on global occupational fraud. The term occupational fraud refers to frauds that are committed by individuals against the organizations that employ them. Occupational fraud is formally defined as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. The purpose of this article is to take a deeper dive into understanding…
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The Statute of Elizabeth Lives On The Sandy Hook school massacre is the subject of multiple pending litigations commenced by the families of students killed in the tragedy. Alt-right radio show host and prominent conspiracy theorist, Alex Jones, is the main target of these actions following years of broadcasting that the shooting was a hoax. The initial actions are based on allegations of defamation and intentional infliction of emotional distress. Unfortunately, the entry of this judgment against Jones is not the end of the legal battle for the plaintiffs as they are now faced with the harsh reality that Jones…