Business Valuation Process in Divorce Cases

Trying Divorce Cases Overview of the Business Valuation Process Marc Bello, CPA/ABV, CVA, MAFF, MST October 20, 2017

CONFIDENTIAL 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 2 | edelsteincpa.com

CONFIDENTIAL Objectives How to recognize if a Business Valuation may be required 1. Overview and Understanding of the Business Valuation Process 2. Discussion with your client. 3. 3 | edelsteincpa.com

CONFIDENTIAL Objective #1 How to recognize if a Business Valuation may be required 4 | edelsteincpa.com

CONFIDENTIAL 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 5 | edelsteincpa.com

CONFIDENTIAL 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? 6 | edelsteincpa.com

CONFIDENTIAL Financial Information 7 | edelsteincpa.com

CONFIDENTIAL 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. 8 | edelsteincpa.com

CONFIDENTIAL Objective #2 The Business Valuation Process 9 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Step 6: Value & Delivery Step 5: Sanity Checks Step 4: Discounts & Premiums Step 3: Valuation Approaches Step 2: Financial, Economic & Industry Analysis Step 1: Understanding the Engagement 10 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Determine Analyze Limiting Conditions Experience & Qualifications Legal & Regulatory Requirements Professional Standards Understanding the Engagement Purpose & Client Valuation Date Standard of Value Premise of Value Interest to be Valued Type of Report 11 | edelsteincpa.com

CONFIDENTIAL Standard of Value Fair Market 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. 12 | edelsteincpa.com

CONFIDENTIAL Standard of Value Bernier v. Bernier (Potential departure from FMV) SJC-09836 449 Mass. 774 (2007) the judge must take particular care to treat the parties not as arm s-lengthhypothetical buyers and sellers in a theoretical open market but as fiduciaries entitled to equitable distributionof their marital assets . 13 | edelsteincpa.com

CONFIDENTIAL concept Fair Market Value The IRS has defined FMV in Revenue Ruling 59-60 as follows: 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. The price at which the property would 14 | edelsteincpa.com

CONFIDENTIAL 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: 15 | edelsteincpa.com

CONFIDENTIAL Considerations under Rev. Rul. 59-60 (cont.) (a) The nature of the business and the history of the enterprise from its inception. (b) The economic outlook in general and the condition and outlook of the specific industry in particular. (c) The book value of the stock and the financial condition of the business. (d) The earning capacity of the company. (e) The dividend-paying capacity. 16 | edelsteincpa.com

CONFIDENTIAL Considerations under Rev. Rul. 59-60 (cont.) Whether or not the enterprise has goodwill or other intangible value. (f) (g) Sales of the stock and the size of the block of stock to be valued. (h) 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. 17 | edelsteincpa.com

CONFIDENTIAL Premise of Value Liquidation Value Asset Approach Market Method Going Concern Value Income Method Market Method 18 | edelsteincpa.com

CONFIDENTIAL Level of Value 19 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Financial Site Visit Financial, Economic & Industry Analysis Economic/Industry Global/National/Local Analysis Trade Publications Internet/Web Sites Reliability of Information Normalizing Adjustments Benefit Stream Understanding the Engagement 20 | edelsteincpa.com

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

CONFIDENTIAL 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 22 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Asset Income Capitalization of Income/Cash Flow Discounted Cash Flow WACC Valuation Approaches Adjusted Net Assets Excess Earnings Market Completed Transactions Public Guideline Company Financial, Economic & Industry Analysis Understanding the Engagement 23 | edelsteincpa.com

CONFIDENTIAL Valuation Approaches Asset 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. 24 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Discounts & Premiums Minority/Control Marketability Mergerstat Restricted Stock Studies Big Tax Pre IPO Studies Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement 25 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Purchase Justification Other Approaches Sanity Checks Subsequent Events Rules of Thumb Discounts & Premiums Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement 26 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Report Value & Delivery Weightings Calculation of Value Summary Report Oral Report Selecting Approaches Sanity Checks Discounts & Premiums Valuation Approaches Financial, Economic & Industry Analysis Understanding the Engagement 27 | edelsteincpa.com

CONFIDENTIAL Overview of the Valuation Process Report Value & Delivery Weightings Calculation of Value Summary Report Oral Report Selecting Approaches Purchase Justification Other Approaches Sanity Checks Subsequent Events Rules of Thumb Discounts & Premiums Minority/Control Marketability Mergerstat Restricted Stock Studies Big Tax Pre IPO Studies Asset Income Capitalization of Income/Cash Flow Discounted Cash Flow WACC Valuation Approaches 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 Financial, Economic & Industry Analysis Understanding the Engagement Economic/Industry Global/National/Local Analysis Trade Publications Internet/Web Sites Determine Purpose & Client Valuation Date Standard of Value Premise of Value Interest to be Valued Type of Report 28 | edelsteincpa.com

CONFIDENTIAL Objective #3 Discussions with Clients 29 | edelsteincpa.com

CONFIDENTIAL What are common conundrums in a small business valuation Explain Unique factors in how a business valuation for divorce is performed. 1. Does the business represent an asset or an income stream? 2. How to deal with a business owner that represents themselves as the whole business? 3. What is reasonable compensation adjustment and should one be made? 4. Do we have a potential double dip? 5. Personal vs. Enterprise Goodwill. 6. 30 | edelsteincpa.com

CONFIDENTIAL 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? 31 | edelsteincpa.com

CONFIDENTIAL 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). 32 | edelsteincpa.com

CONFIDENTIAL QUESTIONS?? 33 | edelsteincpa.com

CONFIDENTIAL THANK YOU 34 | edelsteincpa.com