Trying Divorce Cases “Overview of the Business Valuation Process” Marc Bello, CPA/ABV, CVA, MAFF, MST October 28, 2016

Contact Information: Marc Bello Edelstein & Company LLP 160 Federal Street Boston, MA 02110 mbello@edelsteincpa.com 617-478-3423 http://www.edelsteincpa.com/about-us/leadership.aspx

Objectives How to recognize if a Business Valuation may be required Overview and Understanding of the Business Valuation Process Discussion with your client.

How to recognize if a Business Valuation may be required Objective #1 How to recognize if a Business Valuation may be required

How To Recognize If A Business Valuation May Be Required Ask your client Request Financial Information: Tax Returns Financial Statements Internet Research http://corp.sec.state.ma.us/corp/corpsearch/corpsearchinput.asp

Communication With A Client What do you do? Do you have ownership interest in your business? Do you own the whole business? If not, what percent do you own? What type of business is it? (service, manufacturing, medical, technology) How many employees to you have? Do you have a management team? Is your business local, national or global?

Financial Information

Business Entities Identified on Personal Income Tax Return Schedule C – An unincorporated business and/or a single member limited liability company. Pass Through Business – A business which could be a limited liability company, partnership, S Corporation, Trust An Individuals ownership in a C Corporation would not be disclosed on the individuals tax return.

The Business Valuation Process Objective #2 The Business Valuation Process

Overview of the Valuation Process Step 6: Value & Delivery Step 4: Discounts & Premiums Step 3: Valuation Approaches Step 2: Financial, Economic & Industry Analysis Step 1: Understanding the Engagement Step 5: Sanity Checks

Overview of the Valuation Process Determine Purpose & Client Standard of Value Interest to be Valued Understanding the Engagement Valuation Date Premise of Value Type of Report Analyze Limiting Conditions Experience & Qualifications Legal & Regulatory Requirements Professional Standards

Standard of Value Fair Market Value Fair Value “The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” Fair Value In the states that have adopted the Uniform Business Corporation Act, the definition of fair value is: “Fair Value,” with respect to a dissenter’s shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.

Standard of Value Bernier v. Bernier – SJC-09836 449 Mass. 774 (2007) (Potential departure from FMV) “the judge must take particular care to treat the parties not as arm’s-length hypothetical buyers and sellers in a theoretical open market but as fiduciaries entitled to equitable distribution of their marital assets”.

concept Fair Market Value The IRS has defined FMV in Revenue Ruling 59-60 as follows: “The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter us not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”

Appraiser Considerations Under Revenue Ruling 59-60 .01 It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the fair market value, should be considered. The following factors, although not all-inclusive are fundamental and require careful analysis in each case:

Considerations under Rev. Rul. 59-60 (cont.) The nature of the business and the history of the enterprise from its inception. The economic outlook in general and the condition and outlook of the specific industry in particular. The book value of the stock and the financial condition of the business. The earning capacity of the company. The dividend-paying capacity.

Considerations under Rev. Rul. 59-60 (cont.) Whether or not the enterprise has goodwill or other intangible value. Sales of the stock and the size of the block of stock to be valued. The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

Premise of Value Liquidation Value Going Concern Value Asset Approach Market Method Going Concern Value Income Method

Level of Value

Overview of the Valuation Process Financial, Economic & Industry Analysis Understanding the Engagement Economic/Industry Global/National/Local Analysis Trade Publications Internet/Web Sites Financial Site Visit Reliability of Information Normalizing Adjustments Benefit Stream

Site Visit Sit down and go over with management Opportunity to learn about the company Take a tour of the facility

Normalizing Adjustments Owner’s Compensation Attorney Beware: Priority, Prejudices, and Pitfalls Tax affecting for Pass-through entities Depreciation Non-recurring activity Non-operating assets and/or liabilities

Overview of the Valuation Process Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement Income Capitalization of Income/Cash Flow Discounted Cash Flow WACC Asset Adjusted Net Assets Excess Earnings Market Completed Transactions Public Guideline Company

Valuation Approaches Asset Approach Income Approach Market Approach Based on a balance sheet Historical vs. Adjusted to Fair Market Value Income Approach Based on income or cash flow statements Apply a risk factor (discount rate or capitalization rate) Market Approach Value based on transaction of comparable companies or publicly traded company information.

Overview of the Valuation Process Discounts & Premiums Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement Minority/Control Mergerstat Big Tax Marketability Restricted Stock Studies Pre IPO Studies

Overview of the Valuation Process Discounts & Premiums Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement Sanity Checks Purchase Justification Rules of Thumb Other Approaches Subsequent Events

Overview of the Valuation Process Value & Delivery Discounts & Premiums Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement Sanity Checks Weightings Selecting Approaches Report Calculation of Value Summary Report Oral Report

Overview of the Valuation Process Determine Purpose & Client Standard of Value Interest to be Valued Value & Delivery Discounts & Premiums Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement Sanity Checks Weightings Selecting Approaches Purchase Justification Rules of Thumb Minority/Control Mergerstat Big Tax Income Capitalization of Income/Cash Flow Discounted Cash Flow WACC Economic/Industry Global/National/Local Analysis Trade Publications Internet/Web Sites Valuation Date Premise of Value Type of Report Report Calculation of Value Summary Report Oral Report Other Approaches Subsequent Events Marketability Restricted Stock Studies Pre IPO Studies Asset Adjusted Net Assets Excess Earnings Market Completed Transactions Public Guideline Company Financial Site Visit Reliability of Information Normalizing Adjustments Benefit Stream Analyze Limiting Conditions Experience & Qualifications Legal & Regulatory Requirements Professional Standards

Discussions with Clients Objective #3 Discussions with Clients

What are common conundrums in a small business valuation Explain Unique factors in how a business valuation for divorce is performed. Does the business represent an asset or an income stream? How to deal with a business owner that represents themselves as the whole business? What is reasonable compensation adjustment and should one be made? Do we have a potential double dip? Personal vs. Enterprise Goodwill.

Communication Expectations: Joint or Independent Valuation? What options do we have? Conclusion of Value Calculation of Value What is the timeframe to complete? How many meetings do we have and who do you meet with? What type of work product do you deliver?

Business Valuation &Divorce Case Law Bernier v. Bernier, SJC-09836, 2007 J.S. v. C.C., SJC-10315, 2009 Caveney v. Caveney, 81 Mass. App. Ct. 102 Adams v. Adams 459 Mass. Apt Ct 361 (2011).

QUESTIONS??

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