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Volatility of Financial Metrics: Important Data for Contingent Consideration Valuations

This article presents the first detailed statistical analysis of the volatilities of various commonly encountered financial metrics used in contingent consideration (and earn-out) agreements. The valuation of contingent consideration using an option-based methodology and non-equity volatilities is becoming more common in business valuation. We provide clear evidence that the volatility of five financial metrics—revenue; earnings before interest, taxes, depreciation, and amortization (EBITDA); EBIT, net income, and total assets—is strongly, negatively related to firm size and ...

In re Marriage of Brown

In this Illinois divorce case, the appellate court affirmed the circuit court’s determination of value of the husband’s business by the husband’s expert even though evidence was presented that the expert did not follow the AICPA Business Valuation Standards. Further, the husband’s expert did not consider any enterprise goodwill and used an unorthodox method to determine the value of the business. The wife’s expert asserted that the husband’s expert did not provide a fair market value but rather did a “calculation.” The appellate court also affirmed the circuit court’s decision not to exclude the testimony of the husband’s expert witness.

Illinois Appellate Court Does Not Accept Valuation Including Enterprise Goodwill

In this Illinois divorce case, the appellate court affirmed the circuit court’s determination of value of the husband’s business by the husband’s expert even though evidence was presented that the expert did not follow the AICPA Business Valuation Standards. Further, the husband’s expert did not consider any enterprise goodwill and used an unorthodox method to determine the value of the business. The wife’s expert asserted that the husband’s expert did not provide a fair market value but rather did a “calculation.” The appellate court also affirmed the circuit court’s decision not to exclude the testimony of the husband’s expert witness.

Appellate court KOs unaccrued interest on dissipated assets

In a divorce case, an appellate court vacated the order of the trial court that erroneously charged the husband with over $4 million in unaccrued interest on marital assets that the husband fraudulently dissipated from the marital estate.

Mohen v. Mohen

In the trial court (TC), the wife was awarded $4,360,158 of mostly unaccrued interest on the corpus of trusts the husband set up unilaterally for the children. The TC took the value of those trusts, $9,291,372, as part of the marital estate. The TC also added $990,945 of interest that the trusts had received and the remaining unaccrued future interest for a total value of “distribution” paid to the husband of $14,642,475 related to the trusts. The appellate court (AC) determined that the future interest was future interest and, thus, not part of the marital estate. However, the AC let stand the determination that the value of the trusts were to be treated as a distribution to the husband.

Husband Dissipates Assets by Placing Them in Trusts for the Children, but the Appellate Court Does Not Allow Unaccrued Interest

In the trial court (TC), the wife was awarded $4,360,158 of mostly unaccrued interest on the corpus of trusts the husband set up unilaterally for the children. The TC took the value of those trusts, $9,291,372, as part of the marital estate. The TC also added $990,945 of interest that the trusts had received and the remaining unaccrued future interest for a total value of “distribution” paid to the husband of $14,642,475 related to the trusts. The appellate court (AC) determined that the future interest was future interest and, thus, not part of the marital estate. However, the AC let stand the determination that the value of the trusts were to be treated as a distribution to the husband.

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues.

Island Light & Power Co. v. Sara Golvinveaux McGinnes 2011 Trust

In this shareholder dissent suit, the one-third shareholder of Island Light & Power Co. (aka BIPCO) dissented to a forced sale of the assets of BIPCO resulting in a liquidation of BIPCO and of the shareholder Trust’s stock. In a resulting bench trial, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest held by the Trust.

Court Adopts its Own Methodology in Determining Fair Value in a Shareholder Dissent Suit

In this shareholder dissent suit in Rhode Island, the one-third shareholder of Island Light & Power Co. (aka BIPCO) dissented to a forced sale of the assets of BIPCO resulting in a liquidation of BIPCO and a liquidation of the shareholder Trust’s stock. In a bench trial resulting from the dissent, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest held by the Trust.

Tax Court deals another blow to cannabis dispensaries

In recent years, numerous cannabis businesses that are legal under state law have unsuccessfully challenged section 280E of the Internal Revenue Tax Code, which prohibits tax deductions for a business that “consists of” trafficking in a controlled substance.

Power Panel: Live Expert Answers for Today's Tough BV Questions

What is going on next in BV? While we don’t have a crystal ball, we do have the next best thing. Thought leaders Jay Fishman, Neil Beaton, Ray Rath, and Stacy Collins on hand to answer your questions on what is changing, trends within the profession, and thought processes behind tackling tough problems. What’s more, if you send in a video of yourself asking the question, you will get free admission to the session. Use ...

Benefit of the Bargain Economic Damages

With good reason, experts in economic damages focus on lost profit calculations in determining breach of contract claims and other litigation. Determining benefit of the bargain is encountered less often but is an important skill for valuation experts to know for litigation. Join Michael Pakter to learn the essential elements of determining benefit of the bargain damages.

Valuing Enterprise Cash Flows

The integrated theory of business valuation provides a conceptual framework for disciplined analysis of valuation questions. Too often, valuation analysts are tempted to view individual components of a valuation assignment on a piecemeal basis. Adhering to the integrated theory helps valuation analysts develop base valuation conclusions, discounts, and premiums that are rooted in a shared perspective of the subject company and the subject ownership interest. In Part 1 of the series, Chris Mercer and Travis ...

Valuing Small and Micro Businesses Using the Income Method

Focus in on valuing micro and small businesses using the income methods of business valuation. Learn to distinguish differing risk factors between large companies and micro and very small companies. Join Gregory Caruso for a deep dive into problematic areas of actual small-business valuation cases to review theory and tie it into the actual application of methods using best practices and professional judgment. Audience questions and succinct opinions welcomed in this hands-on event.

Reliable Valuations for Small and Medium Enterprise: M&A Methods Win

If you have been involved in an M&A transaction and seen how different the M&A model is from the buildup method with public data, have you ever wondered why the M&A model isn’t a key valuation approach or wondered how M&A data differ in character from public market data? In this seminar, Jim Lisi explains why the M&A model with private data is the more reliable approach. The difference between deal data for whole companies ...

Valuation of Senior Living and Post-Acute Providers

Join Jed Cheney to learn the considerations when valuing senior living and post-acute healthcare providers ranging from assisted living and memory care to skilled nursing and home health/hospice providers. With insights on the industry at large and government reimbursement considerations along with environmental considerations in the senior living and post-acute provider operating environment, this webinar will focus on various value drivers impacting these providers that should be considered. The impacts of COVID-19 have been significant ...

Case Studies in Contingent Consideration

A significant component of the transaction price in an M&A or buyout transaction often consists of proceeds that are “contingent” upon the target company’s achievement of certain performance targets after the closing has taken place. From the perspective of the seller, “contingent consideration” represents the right to receive additional assets or equity interests from the buyer (earnout), or the obligation to return part of the proceeds from the transactions (clawback) if specified future events occur ...

Accounting fraud causes Berkshire Hathaway subsidiary to overpay for sinking German manufacturer

Financial experts were unable to prevent a Berkshire Hathaway subsidiary, Precision Castparts Corp. (PCC), from acquiring a German family business for five times as much as the collapsing company was worth, recent articles in the New York Times and the German newspaper Handelsblatt report.

How would a wealth tax impact business valuation?

The FT ran a long interview with Gus O’Donnell last week, saying that ‘a UK wealth tax is more likely than ever because of the reordering of politics caused by the coronavirus pandemic.’

Structure, Valuation & Tax Insights for Logistics & Trucking Companies

Join Jaclyn Burket Frank and Ricky Castillo for an engaging trip into the world of logistics and trucking businesses. Discover the different types of entity structure along with the advantages and disadvantages of each structure. Learn how the 2018 tax law impacted each entity structure and common deductible/nondeductible expenses for the logistics and trucking industry. The industry-specific adjustments to consider along with specific questions to ask business owners to determine whether economic, governmental, and location ...

Valuation underpinning contested stock sale reflects fair value, Court of Chancery says

In a breach of fiduciary duty action arising out of a controversial stock sale, the Delaware Court of Chancery dismissed the plaintiff’s attacks on the underlying valuation, noting the appraiser was “exceptionally knowledgeable about the industry” and held “informed beliefs” as to the company’s specific structure.

Journal of Business Valuation 2019 Edition

From the CBV Institute ...

Court Rejects Parties’ Expert Valuations of Unique Sailing Vessel as Unreliable

In damages case involving unique ship for which there was no active market, court says parties’ experts provided some data points relevant to valuing ship but failed to give adequate explanations of rationales and calculations, making testimony unreliable; court performs its own analysis.

In re Manhattan By Sail, Inc.

In damages case involving unique ship for which there was no active market, court says parties’ experts provided some data points relevant to valuing ship but failed to give adequate explanations of rationales and calculations, making testimony unreliable; court performs its own analysis.

Coster v. UIP Companies, Inc.

In breach of fiduciary duty action, court says stock sale passes enhanced fairness review; appraiser valuing real estate investment services company before sale is eminently qualified and knowledgeable about industry; capitalized cash flow method “generated a reliable indicator” of company’s value.

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