Current Update in Valuations Calculation and Conclusion of Value and Other Roles Valuators Play Marc Bello Courtney Sparks White
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Current Update in Valuations Tuesday, June 17, 2014 Marc Bello, CPA, ABV, MST, CVA, MAFF Calculation and Conclusion of Value and Other Roles Valuators Play Courtney Sparks White, J.D., LL.M., ASA, CVA, 4
Goals and Objectives Use current court decisions to understand when a Calculation of Value is appropriate Application of Standards to properly conduct a Calculation of Value Recognize Potential Opportunities to use a Calculation of Value 5
Case Law In re Marriage of Hagar, 2010 Iowa App. WL 4807559 (Nov. 24, 2010) Wood v. Wood, 2011 Mo. App LEXIS 1589 (Nov. 29, 2011) Marriage of Cantarella, 2011 Ca. App. 4 Dist. Unpub. WL 86284 (Jan. 11, 2011) Surgem v. Seitz, 2013 N.J. Super. Unpub. LEXIS 2491 (Oct. 16, 2013) A.C. v. J.O., 2013 N.Y. Misc. LEXIS 3524 (Aug. 12, 2013) 6
In re Marriage of Hagar Iowa - Appeal from Iowa District Court for Dubuque County Facts - Goliath, Inc. family business started by H s parents included both dry cleaning business and rental real estate business - In 1996, the real estate was put into a separate entity - Parties married in 1999 - H & W had ownership interest in Goliath both received distributions and salaries 7
In re Marriage of Hagar Facts (cont.) - In 2008, when W filed for divorce H stopped paying distributions - H withheld documents from W regarding the business - H & W were in the midst of paying H s mother for their interests in the business, a default would forfeit their interests back to his mother - Both H & W filed contempt motions for the other s failure to make required payments - H & W both sought ownership of the business 8
In re Marriage of Hagar Valuation Issues - H s expert make 4 thumb-nail calculations of Goliath with an assumption of $60,000 in salary to H - H s expert s 4 calculations ranged from $(120,000) to $79,329 - H s expert testified this is not a valuation. This was a computation, utilizing rules of thumb that are documented as industry standards but not using the judgment, simply using calculations following each of four suggested formulas. 9
In re Marriage of Hagar Procedure & Holding - Trial court awarded business to H at a value of positive $120,000 - On appeal, H argues value too high and W argues value too low - Appellate Court reviewed the record and saw that the $120,000 figure was negative in the trial court record - Appellate Court valued H s interest at $140,000 10
In re Marriage of Hagar Law & Analysis - Did not rely on H s expert calculations because he admittedly did not use judgment - Court focused on family relationship between business & its landlord (entity controlled by H s mother) - Goliath previously valued at $500,000, but value reduced by debt incurred by H & W - W did not provide expert testimony on the value, but referred to $500,000 as amount she offered to buy H s interest 11
In re Marriage of Hagar Law & Analysis (cont.) - Court found H s assertion of $0 value not credible - Court dismissed H s expert for lack of an opinion - Court did not have evidence from W regarding value - Court based $140,000 value on evidence in the record 12
In re Marriage of Hagar Key Points - Calculation of Value did not withstand litigation - Practice Tip: Review language of the decision to articulate to your clients and attorneys WHY a calculation of value is not appropriate in a litigation setting - As experts, we provide the EVIDENCE for the arguments made by the attorneys - Providing a calculation of value (not an opinion) has the effect of no analysis at all 13
Wood v. Wood Missouri Court of Appeals - Circuit Court of St. Louis County Facts - H has a 30% interest in a flooring company - W s expert provided a Calculation report based on Buy-Sell Agreement (H s 30% interest = $1.63M) - W s expert specifically testified that he was retained to compute the formula and NOT provide an opinion 14
Wood v. Wood Facts (cont.) - Under the Buy-Sell, the value is calculated as the last appraised value plus or minus earnings/losses less dividends paid/declared - H s expert provided an Opinion report (H s 30% interest = $325,000) - H s expert conducted an actual assessment and provided an opinion as to the fair market value of H s interest 15
Wood v. Wood Procedure / Holding - Trial court found W s expert more persuasive and credible and relied on Buy-Sell computation - H appealed arguing trial court should have relied on his expert s OPINION vs. W s expert s CALCULATION - Appellate Court agreed with H and held that W s expert did not attempt to determine the FMV - Reversed and remanded for a proper determination of the FMV of H s interest 16
Wood v. Wood Law & Analysis - Appellate Court : While value can be a determination of fact by the trial court to which we give great deference, and no one formula or method of determining value is binding or conclusive, the rule is that the date of valuation of marital property is the date of trial. 17
Wood v. Wood Law & Analysis - Appellate Court said the calculation failed to comply with this rule - because the Buy-Sell did not seek a fair value or a fair market value and - because the formula does not use a current appraisal (used a 2007 figure) 18
Key Points Wood v. Wood - Would the Calculation have held up if the Buy- Sell had stated Fair Market Value? - As an expert, understand your assignment - Carefully review Buy-Sell provisions - Buy-Sell agreement review OTHER ROLES valuators can play 19
Marriage of Cantarella California Court of Appeals - Fourth District, Division Three Facts - Interesting issue about date of marriage - H & W initially tried to divorce pro se - They entered into an Agreement regarding division of marital property, including a family business W received $30,000 as part of Agreement - Court granted dissolution 20
Marriage of Cantarella Facts (cont.) - W later moved to set aside the decision as to the division of marital property (business & real estate) - W submitted a preliminary valuation prepared by a forensic accountant with value of $172,000 - W prepared the Agreement - W was the bookkeeper for the business 21
Marriage of Cantarella (cont.) Holding - Appellate Court did not grant W s motion that there was a material mistake with respect to the business Law & Analysis - To set aside the judgment regarding the business value, W had to prove that there was a material mistake - W provided Court with a preliminary valuation; therefore, Court said she failed to state her opinion of value 22
Marriage of Cantarella (cont.) Important Take-Aways - Preliminary valuation did not hold up - Expert stated what he did and specifically how he was limited - Watch for bad facts 23
Surgem v. Seitz New Jersey - Appeal from Superior Court (Shareholder Dispute) Facts - P was a surgeon & recognized a need for surgical centers - P hired D as consultant to review marketing software to assess profitability of centers - D recommended P shut down centers - P & D then syndicated a number of other surgery centers 24
Surgem v. Seitz Facts (cont.) - D s employment and compensation were memorialized in a private placement memoranda - D had approximately 10% ownership in Surgem - D was terminated for cause and P filed suit to establish FAIR VALUE of D s ownership 25
Surgem v. Seitz Procedure & Holding - Superior Court rejected proposed buy-sell and rejected the opinion of D s expert - D appealed, challenging the amount and value of his ownership - Appellate Court agreed with Superior Court 26
Surgem v. Seitz Law & Analysis - Acceptance or rejection by the trial court of an expert opinion as to valuation are matters reserved for the trial court - Case law in this jurisdiction: trial court should not be reduced absent an abuse of discretion - Superior (trial) court determined that D s expert did not appraise the fair value of Surgem because he prepared a Calculation of Value - This left P s expert uncontroverted and ultimately accepted by the trial court 27
Key Points Surgem v. Seitz - A Calculation of Value did not withstand litigation - Know what it means to issue a Calculation of Value 28
New York - Supreme Court of NY A.C. v. J.O. Facts - W is a dentist (former attorney) - H is a first assistant directory on Bluebloods (tv show) and has a separate entity for his free-lance jobs - No expert appraisal for either business - CPA issued a preliminary (calculation) report on the value of both businesses 29
A.C. v. J.O. Holding - Court valued W s dental practice - Court concluded that H s business was solely a conduit for jobs where he was a free-lancer vs. an employee - Court accepted CPA s preliminary (calculation) analysis 30
A.C. v. J.O. Law & Analysis - W s attorney argued that the CPA/Expert did not perform a appraisal, only a calculation report - Court did not accept this argument because - both parties engaged the CPA/Expert and - the Court found him credible 31
A.C. v. J.O. Key Points - Preliminary (Calculation) Report upheld based on FACTS & CIRCUMSTANCES of the case o Jointly retained o Credibility of testimony 32
What have we learned from these cases? 33
Hagar Danger of a Calculation as a testifying expert. NO JUDGEMENT Contributed by Expert Wood Beware of a Buy Sell Agreement A testifying Expert needs an Opinion Don t be blind-sided by an Appeal Surgem Danger of a Calculation as a testifying expert. Calculation Report not Accepted by the Court A.C v J.O CPA allowed to testify and value accepted by court, because jointly retained and found credible. What CPA is NOT Credible 34
Setting yourself up for Success using a Calculation of Value 35
Keys to Success No. 1: Make sure you understand the Professional Standards No. 2: Identify potential engagement and opportunities to engage in a Calculation of Value No. 3: Communicate to clients the limitation of a Calculation 36
NACVA Professional Standards Four Main Sections o General & Ethical Standards o Scope of Services o Development Standards o Reporting Standards 37
General & Ethical Standards Always apply No matter what 38
Scope of Services Valuation Services o A member may express either a Conclusion of Value or a Calculated Value o When performing such Valuation Services, members shall comply with Developmental & Reporting Standards 39
Scope of Services Valuation Services OR Other Services Valuation Engagement Conclusion of Value Calculation Engagement Calculated Value Consulting Expert Non-Valuation Litigation Valuator Judgment Agreement with Client 40
Calculation of Value o Calculation Engagement o Agreement between Client and Member regarding approaches, methods, and extent of procedures 41
Conclusion of Value o Valuation Engagement o Member applies valuation approaches and methods o In the member s professional judgment o Appropriate under the circumstances 42
Other Services Apply when a valuator does not have to apply any of the development standards Example: Negotiating a Sale for a Client 43
Development Standards o NACVA Professional Standards, Section IV o Applicable when expressing a Conclusion OR a Calculation of Value o Expression of Value o Single Number o Range o Avoid Bias in developing a Conclusion of Value 44
Development Standards (cont.) o Scope Limitations beware o Professional judgment is used to select approaches and methods o Rules of thumb acceptable as reasonableness checks, not as standalong method 45
Reporting Standards Types of Report Detailed Summary Calculation Type of Engagement Conclusion of Value Conclusion of Value Calculation of Value 46
Reporting Standards (cont). Statement explicitly required in a Calculation Engagement: This Calculation Engagement did not include all the procedures required for a Conclusion of Value. Had a Conclusion of Value been determined, the results may have been different. 47
Reporting Standards (cont). Litigation Exemption: What it Really Means o A valuation performed for a matter before a court is exempt from the Reporting Standards o Whether matter goes to trial or settles o Does NOT relieve the member from complying with Development Standards or General/Ethical Standards 48
Engaged to determine a Calculation of Value 49
Defining the Assignment Identify the various types of services valuators provide From the initial phone call CLARITY is key Purpose? - Litigation vs. Consulting - Internal vs. External What is your role in the engagement? - Expert vs. Consultant/Advisor 50
Engagement Letter What to Include NACVA Business Valuation Standards Resource Tools Sample Engagement Letters - Valuation Engagement - Calculation Engagement - Litigation Engagement Other - BV Development Checklist - BV Report Checklist 51
Procedures Applied in a Calculation and Questions that arise? Reliance on historical financial statements? How do we handle normalization adjustments? Should we determine a capitalization rate? How are we to select comparable sales in a completed transaction method? Should we determine a discount or premium? How should we deliver the completed project? 52
Other Roles o Valuation Consulting o Non-litigation o Buy-sell agreement review o Consulting Expert o Litigation 53
Great Debate Conclusions of Value Calculations of Value 54
When are they required? Calculation Conclusion Other Services Opinion not necessary Internal Management Planning Pre-Litigation / Planning When valuator s opinion is required IRS Estate IRS Gift As a Testifying Expert: Litigation Family Law Litigation Shareholder Disputes Litigation Bankruptcy Financial Reporting Consulting Expert Litigation Non-Valuation Services 55
Overlap Conclusions & Calculations o Calculation / Conclusion different experts, same case o Calculation Conclusion same expert, same case 56
Overlap Conclusions & Calculations (cont.) o Practical considerations Be clear about what you are / are not doing o Engagement letter language o Report language / Agreement with client 57
Questions 58
Thank you! mbello@edelsteincpa.com 617-227-6161 Marc Bello, CPA, ABV, MST, CVA, MAFF Boston, MA cwhite@claruspartners.com 614-545-9100 Columbus, OH Courtney Sparks White, J.D., LL.M., ASA, CVA, 59