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

2. Contact Information:
Marc Bello Edelstein & Company LLP 160 Federal Street Boston, MA

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

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

5. How To Recognize If A Business Valuation May Be Required
Ask your client
Request Financial Information:
Tax Returns
Financial Statements
Internet Research

6. 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?

7. Financial Information

8. 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.

9. The Business Valuation Process
Objective #2
The Business Valuation Process

10. 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

11. 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

12. 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.

13. Standard of Value
Bernier v. Bernier – SJC 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”.

14. concept
Fair Market Value
The IRS has defined FMV in Revenue Ruling 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.”

15. 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:

16. 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.

17. 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.

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

19. Level of Value

20. 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

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

22. 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

23. 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

24. 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.

25. 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

26. 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

27. 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

28. 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

29. Discussions with Clients
Objective #3
Discussions with Clients

30. 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.

31. 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?

32. 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).

33. QUESTIONS??

34. THANK YOU