02 Jan 2023
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How Business Valuators Estimate the DLOM in a Volatile Market

Roger Rossmeisl, CPA
Valuation Briefs
How Business Valuators Estimate the DLOM in a Volatile Market

When valuing a business, recent market volatility may well translate into higher discounts for lack of marketability (DLOM) because investors generally will pay less for illiquid, risky investments. However, there’s a silver lining to economic uncertainty: It provides an opportunity for wealthy individuals to gift private business interests at significant discounts, potentially saving a substantial amount in taxes. DLOM basics Marketability is the ability to quickly or readily convert property to cash at minimal cost, according to the International Valuation Glossary — Business Valuation. Also implied is a high degree of certainty that an expected selling price will be realized. The two most popular sources of empirical data valuators use to support DLOMs are restricted stock and pre-initial public offering (IPO) studies. These studies suggest that discounts for...

10 Dec 2022
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Will Your Business Valuation Expert Survive a Daubert Challenge?

Roger Rossmeisl, CPA
Valuation Briefs
Will Your Business Valuation Expert Survive a Daubert Challenge?

The 30-year anniversary of Daubert v. Merrell Dow Pharmaceuticals Inc. (509 U.S. 579) will be coming up in 2023. This decision officially made federal judges the “gatekeepers” of expert evidence against “junk science.” Landmark case In 1993, Daubert established a two-pronged test for admissibility under Rule 702 of the Federal Rules of Evidence: An expert’s methodology must be 1) reliable, and 2) relevant. This case also identified four nonexclusive factors to consider in determining the reliability of an expert’s theory or technique: Has it been tested, and can it be tested? Has it been subject to peer review or publication? What’s its known or potential error rate? Is it generally accepted in the relevant scientific or technical community?   The discounted cash flow method is an example of a...

06 Dec 2022
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Going Concern Value, Liquidation Value or Somewhere in Between

Roger Rossmeisl, CPA
Valuation Briefs
Going Concern Value, Liquidation Value or Somewhere in Between?

When valuing a business, it’s important to clearly identify the appropriate premise of value. There are two basic options: going concern value or liquidation value. In general, liquidation value sets the floor for a company’s value. When a company is “worth more dead than alive” — such as in a Chapter 7 bankruptcy filing — liquidation value is typically the appropriate premise of value. But it also may be relevant in other situations, as a recent Michigan Court of Appeals case demonstrates. Going concern vs. liquidation value Most valuations focus on a business’s going-concern value. That is, what’s the value of a business enterprise that’s expected to continue to operate into the future? But in certain situations, liquidation value can be an important benchmark. There are two types...

13 Nov 2022
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Finding Comparable Transactions to Use in Business Valuation

Roger Rossmeisl, CPA
Valuation Briefs
Finding Comparable Transactions to Use in Business Valuation

The market approach is an intuitive way to value a private business interest. It bases the subject company’s value on sales of other similar businesses or business interests, which are commonly referred to as “guideline transactions” or “comparables.” Each business is unique, so identifying an exact match is impossible. 2 methods The following two primary valuation methods fall under the market approach umbrella: Guideline public company method. Under this method, value is derived from comparable stocks (or partnership interests) that are actively traded on the New York Stock Exchange or other public markets. Public stock prices are used to compute pricing multiples — such as price-to-revenue, price-to-net income and price-to-book value — to apply to the subject company’s results. Financial variables may be calculated for a variety...

13 Nov 2022
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When a Valuation Professional Finds Fraud

Roger Rossmeisl, CPA
Valuation Briefs
When a Valuation Professional Finds Fraud

Imagine you’ve got your eye on a business that seems like an attractive investment or acquisition target. It boasts strong earnings, competitive growth estimates and a clean balance sheet. But this business has a secret: fraud. And fraud can dramatically change the prospects — and value — of a company. That’s why, when conducting business appraisals, valuation professionals keep their eyes peeled for signs that fraud is occurring or could easily occur. Gauging fraud risk Business value is a function of risk and return, and one critical risk factor companies face is fraud. So valuators conducting an appraisal might ask management about the company’s internal controls — its policies and procedures to protect assets and ensure reliable financial statements. They may look for particular internal controls that...

13 Nov 2022
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How Valuators Use Visual Aids

Roger Rossmeisl, CPA
Valuation Briefs
How Valuators Use Visual Aids

Business valuation professionals who serve as expert witnesses in court face two daunting tasks: First, they must capture the attention of a judge or jury. Then they need to make complex financial analyses understandable. That’s easier said than done after the trier of fact already has listened to hours of testimony in commercial litigation. Impactful visual aids can help break up the monotony and drive home key points in an expert’s oral testimony and written reports. Achieving maximum impact Many people are visual learners, so oral testimony alone may not be enough to enable them to understand complex issues, such as discounted cash flow analyses or profit trends. Experts who supplement their analyses with pictures are likely to leave a lasting impression. Today, most courtrooms are equipped with...

09 Nov 2022
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Business Valuations Needed for Private Stock Donations

Roger Rossmeisl, CPA
Valuation Briefs
Business Valuations Needed for Private Stock Donations

Charitable contributions can be an effective way to lower taxes for the current tax year, but they don’t necessarily have to be made with cash. Charities also welcome donations of company stock, which offer a hidden bonus to donors if the shares have appreciated in value over the years. To reap the tax benefits on private stock donations, however, it’s essential to obtain a business valuation from a “qualified appraiser.” Tax benefits Since 2007, corporate stock has been the most popular type of non-cash charitable contribution. Corporate stock donations amounted to $39.6 billion in 2019, or 54.4% of all non-cash contributions for that year, according to the Summer 2022 Statistics of Income Bulletin published by the IRS. A taxpayer who itemizes can deduct the fair market value (FMV)...

25 Sep 2022
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Putting a Price Tag on Intangible Assets

Roger Rossmeisl, CPA
Valuation Briefs
Putting a Price Tag on Intangible Assets

Intangible assets — such as patents, copyrights and trademarks — are essential to the operations of many companies, but they’re rarely reported on the balance sheet. And even when they are reported due to an acquisition, book value is often based on historical cost under U.S. Generally Accepted Accounting Principles (GAAP). However, historical cost may not represent current market value, especially if the acquisition happened long ago and the asset’s value has appreciated over time. Valuing intangible assets is essential in many situations, including shareholder disputes, divorce cases, infringement claims, and gift and estate planning. So how do you determine what intangibles are worth in today’s volatile marketplace? Critical factors When valuing intangible assets, business valuation professionals generally consider the following factors: The economic benefits, direct or indirect,...

24 Sep 2022
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Valuing Goodwill in Divorce: Recent Cases Provide Insight

Roger Rossmeisl, CPA
Valuation Briefs
Valuing Goodwill in Divorce: Recent Cases Provide Insight

Goodwill is one of the most confusing aspects of valuing a business interest for divorce cases. In many states, goodwill needs to be valued and then divided into two pieces: business and personal goodwill. Unfortunately, significant differences in methods and theories exist on this complex issue, as recent case law demonstrates. Key definitions According to the International Valuation Glossary — Business Valuation, “Goodwill can arise as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.” A business interest may possess two types of goodwill: Business (or entity) goodwill. This belongs strictly to the entity itself. Business goodwill may arise from many sources, including the company’s name, phone number, location and special attributes, such as special menu items or recipes at...

24 Sep 2022
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Valuing LLC Profits Interest Awards

Roger Rossmeisl, CPA
Valuation Briefs
Valuing LLC Profits Interest Awards

Limited liability companies (LLCs) sometimes award employees and contractors a unique form of equity-based compensation known as “profits interests.” These interests aren’t actively sold on a public market, so a customized valuation approach is required. Here’s an overview of how business valuation pros determine what these awards are worth for tax and financial reporting purposes. The basics Finding skilled workers is one of the top challenges reported by private businesses today. Employers may award various forms of equity-based compensation to help attract, retain and reward workers for their contributions to the company. LLCs aren’t allowed to issue traditional corporate forms of equity compensation, such as common and preferred shares, stock options, restricted shares and phantom stock. Instead, they can award profits interests to certain employees and contractors for...

ROGER ROSSMEISL, CPA

Kho & Patel CPAs
160 E. Arrow Highway
San Dimas, CA 91773

(714) 325-0442
roger@khopatel.com

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