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 unreasonable, it is important to determine whether any part of the compensation qualifies as a “fixed payment.” This article discusses the excise tax, when the “reasonableness” test relates back and what is considered a “fixed payment.” Internal Revenue…
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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. He notes that Porter reminds the reader of an important question: “What forces drive the competition in the industry?” and observes in the litigation reports this question is often not addressed. This is a potential problem…
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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 importance and opportunity of recognizing the other ways goodwill becomes a factor and the opportunity this realization presents practitioners. Perhaps the title to this article may be a bit misleading since it implies that goodwill is only newly relevant in applications outside of family law.…
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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 private company. This discussion is not intended to provide legal, accounting, or taxation advice. The scope of this discussion is limited to stock awards, stock options, and partnership profits interests. Introduction Valuation analysts (analysts) often work with private companies (and particularly…
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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 the Unimpeachable Neutrality series will attempt to cover the most pertinent unspoken rules of being a financial expert that you might not find issued, published, promulgated, or cited as authoritative. As…
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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 mentioning that the decisive feature for determining the difference in country risk is the area of activity, not the location of the corporate headquarters. Our goal is to determine what should be the multiple if…
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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 taxation and valuation considerations also apply to the corporate acquirer’s purchase of the corporate subsidiary stock of a parent corporation seller. However, the principal focus of this discussion will be on valuation and taxation guidance related to…
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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 countries. This paper presents the proposed approach to incorporate country risk premium differentials into the multiples. It describes the possible ways of obtaining the country risk premium and the procedure of making the adjustment to the…
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(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 also apply to the corporate acquirer’s purchase of the corporate subsidiary stock of a parent corporation seller. However, the principal focus of this discussion will be on valuation and taxation guidance related to the employee/shareholders’ sale of a closely held…
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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 (on his experience). He proposed that all companies have lifecycles. They begin as startups and then proceed to evolve from young growth, high growth, mature growth and decline; these phases…
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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 part imagines some changes that may occur in a world where big companies pay taxes based (mostly) on GAAP income. Here, the author envisions many items…
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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 changes that may occur in a world where big companies pay taxes based (mostly) on GAAP income. This is the first of a two-part article related…
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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 and data of databases you are relying on in your analyses and reports? This webinar underscored that the professional standards requires analysts to know the strengths and weaknesses of transactional databases, those relied…
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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 of the Relief from Royalty Method (Part III of V) Intellectual Property Valuations: Illustrative Example of the Relief from Royalty Method (Part IV of V) Introduction The first four installments of this five-part discussion summarized the conceptual support for—and the practical application of—the…
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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 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 of the Relief from Royalty Method (Part III of V)[/su_pullquote] Introduction Previous installments of this five-part discussion summarized the…
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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 market approach and the relief from royalty (RFR) method of intellectual property valuation. Prior parts of this series summarized the many reasons to develop the intellectual property valuation and the research and due diligence procedures conducted as…
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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 Dr. Shannon P. Pratt, both in BV and life in general. The article contains some anecdotes of the many times he and Dr. Pratt spent together. This discourse shares my…
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Elements of the Valuation Analysis (Part II of V) This second article of the five-part series on Intellectual Property Valuations summarizes the typical elements of the intellectual property valuation analysis. This part of the discussion focuses on benchmarking and the use of research databases. [su_pullquote align=”right”]Resources:Intellectual Property Valuations: The Relief from Royalty Method (Part I of V)[/su_pullquote] Introduction This five-part series of discussions introduces the market approach and the relief from royalty (RFR) method of intellectual property valuation. Part one of this discussion introduced the typical types of intellectual property and the generally accepted intellectual property valuation approaches and methods.…
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The Relief From Royalty Method (Part I of V) This is the first article of a five-part series that focuses on what valuation analysts and owner/operators need to know about one category of intangible property: intellectual property. There are generally accepted cost approach, market approach, and income approach methods that may be used to value intellectual property. This discussion focuses on the application of the market approach. This discussion focuses on one market approach valuation method: the RFR method. The RFR method is often applied to value an owner/operator’s intellectual property for transaction, taxation, financing, accounting, litigation, and many other…
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Preserving a Legacy In this article, Roger J. Grabowski, FASA, shares with readers a personal story regarding his friendship. The forthcoming 6th edition is a tribute to Dr. Pratt, a close friend and leader of the profession. [su_pullquote align=”right”]Tribute to Shannon Pratt[/su_pullquote] Introduction I am fortunate to have co-authored several books with Shannon. While I had gotten to know Shannon through conferences as well as through teaching valuation courses together, our collaboration began in August 2006 when Shannon asked me to co-author the Cost of Capital 3rd edition. I had edited portions of and contributed to the first two editions.…