For Business Valuations Accounting Standards Codification (ASC) Topic 842: Leases is the lease accounting standard published by the Financial Accounting Standards Board, which replaces prior guidance from ASC Topic 840. ASC 842 brings previously off-balance sheet operating leases onto a company’s balance sheet. The new standard takes effect for private companies in fiscal years starting after December 15, 2 ...

How to Avoid Them! A 409A valuation refers to a method of determining the value of a company's common stock. In other words, the 409A valuation is a method of calculating fair market value (FMV) according to the regulations under the Internal Revenue Code (IRC). This valuation can be carried out using various types of valuation methodologies, however, it is important to avoid pitfalls in 409A valuation when ...

A Claim That is Not Just for Corporations Many taxpayers are familiar with the Internal Revenue Code Section 165 worthless stock deduction. Taxpayers often call on valuation analysts to analyze and document the worthlessness of the stock of a corporate subsidiary or of some other common stock equity interest. The Section 165 loss deduction also applies to the worthlessness of a partnership interest, limited ...

Internal Revenue Code § 4958 imposes excise taxes on the excessive portion of compensation paid by a non-profit organization. Excise taxes must be paid by “disqualified persons” who receive unreasonable compensation as well as by the individuals who approve it. Despite the “excise tax” label, these taxes are generally considered to be a severe form of penalty. In considering whether compensation is unreason ...

What Forces Drive the Competition in the Industry? The author of this article shares his thoughts on the book, Competitive Strategy: Techniques for Analyzing Industries and Competitors. This was a book he had read sections of during his university days, but this time around, read it with a new vantage point considering his education and experiences since then; particularly in the business valuation field. H ...

It is Not Just for Divorce Anymore Personal and enterprise goodwill are not just relevant in marital dissolution cases; they are important considerations in bankruptcy, tax, business succession planning, execution of buy-sell agreements, and transactional matters. These other matters present practitioners with additional ways of differentiating their services. In this article, the author shares the importan ...

Consider the Tax Consequences of Stock Awards, Stock Option Awards, and Partnership Profits Interests This discussion summarizes what analysts need to know about the taxation issues and the security valuation issues related to private company equity incentive compensation programs. It focuses on both the taxation aspects and the valuation aspects of implementing an equity incentive compensation plan at a pr ...

Citation Omitted What makes the world of expert witness services so daunting at times is the fact that so much goes unsaid, untaught, or undefined. For example, the most recent international glossary used by valuation and appraisal professionals across the globe does not define what a conclusion or opinion is. Since saying the silent part out loud seems to be the popular thing to do, this tenth article of t ...

Into the Market-Based Valuation (Part II of II) This is the second of the two-part article regarding country risk. In this second part, the author discusses how to incorporate the risk into multiples. Read Part I here. Incorporating Country Risk into Multiples Having found the value of the country risk premium required, we can proceed with incorporating it into the market-based valuation. It is worth mentio ...

Part II of II This is the second of a two-part article (Read Part I here) that focuses on the situation where the target company is a private corporation, and the sellers are employee/shareholders. This discussion summarizes the taxation and valuation considerations related to a transaction where employee/shareholders are selling the private C corporation stock to a C corporation acquirer. Some of the taxat ...

Into the Market-Based Valuation (Part I of II) This is a two-part article on how to incorporate country risk premium. The market-based approach to valuation is commonly used by market practitioners and is based on the relevant values and multiples from similar assets. One of the differentiators between assets is the country risk related to the operations, when the multiples are collected from various countr ...

(Part I of II) This is a two-part article that focuses on the situation where the target company is a private corporation, and the sellers are employee/shareholders. This discussion summarizes the taxation and valuation considerations related to a transaction where employee/shareholders are selling the private C corporation stock to a C corporation acquirer. Some of the taxation and valuation considerations ...

The Consequences When there is a Mismatch Between the CEO’s Strategy and the Lifecycle the Company is Operating In On December 10, 2021, Aswath Damodaran published a blog titled Musing on Markets. In this blog he asked what makes for a “great CEO”? What happens when there is a mismatch between the lifecycle the company operates in and the strategy pursued by the CEO? He then answered these questions based ( ...

Part II of II This is the second of a two-part article (read Part I) related to the proposed (mostly) GAAP-based income tax in the (perhaps fatally wounded) Build Back Better Act. While the Build Back Better Act may be dead, the GAAP-based income tax is a polarizing concept that may be resurrected soon. The first part focused on why there is a push by some—and pushback by others—on such a tax. The second pa ...

Part I of II This is the first of a two-part article related to the proposed (mostly) GAAP-based income tax in the (perhaps fatally wounded) Build Back Better Act. While the Build Back Better Act may be dead, the GAAP-based income tax is a polarizing concept that may be resurrected soon. The first part focuses on why there is a push by some—and pushback by others—on such a tax. The second part imagines some ...

How (Use of) the Unknown Will Kill You On November 17, 2021, Jim Hitchner presented “How to Attack and Defend the Databases Used by Valuation Analysts”. The presentation raised the following questions: Have you ever been cross-examined by an attorney who is more familiar than you with databases referenced in the valuation report? When was the last time, if ever, that you reviewed and studied the methodology ...

Analysts Caveats and Reporting Guidelines (Part V of V) This fifth and final installment presents valuation analyst caveats and reporting best practices related to the intellectual property valuation. Intellectual Property Valuations: The Relief from Royalty Method (Part I of V) Intellectual Property Valuations: Elements of the Valuation Analysis (Part II of V) Intellectual Property Valuations: Application ...

Illustrative Example of the Relief from Royalty Method (Part IV of V) Previous installments of this five-part discussion summarized the development of the market approach and the relief from royalty (RFR) method of intellectual property valuation. This fourth installment presents an illustrative example of the practical application of the RFR method. [su_pullquote align="right"] Intellectual Property Valuat ...

Application of the Relief from Royalty Method (Part III of V) This is the third article of a five-part series on valuation of intellectual property describing the application of the RFR method. Intellectual Property Valuations: The Relief from Royalty Method (Part I of V) Intellectual Property Valuations: Elements of the Valuation Analysis (Part II of V) Introduction This five-part discussion focuses on the ...

Anecdotes from James R. Hitcher of Moments Spent with Dr. Shannon P. Pratt, a Pioneer in the Business Valuation Industry This discourse shares the author’s long, rewarding relationship with Dr. Shannon P. Pratt, an icon in business valuation (BV). He lived and breathed BV. Outside of his career, he had an intense love of life and liked to have fun. The author, James R. Hitchner, shares what he learned from ...