Case Studies can offer a better understanding of how our Business Valuation services can be used.
While definitions and descriptions can provide useful information regarding forensic accounting, business valuation, and the calculation of economic damages, placing those services in a real-world context facilitates a better understanding of how those services can be used or combined to conduct an in-depth financial analysis.
The following case studies represent fictitious situations that align with various cases we have worked on over the years. If you would like more information regarding how our professional services may be helpful to you, please contact our office.
You break it, you buy it…
Fact Pattern –
Diane had been extremely pleased when she first joined forces with Sam. His background in construction management, coupled with her engineering background and contacts, had driven their business to become a major contender in their niche industry. Unfortunately, in recent years Sam had made what Diane considered to be increasingly erratic business decisions. Since Sam was the controlling shareholder and the corporate agreements were poorly constructed, Diane had little recourse when she disagreed with his decisions. As the company’s profits were now in a free-fall, Diane was faced with mounting pressure to either stay with the company, taking her chances with an increasingly despondent Sam, or evaluate other alternatives.
Important Considerations –
In a situation such as this one, if Diane were to consider leaving the company, she would be faced with either selling her interest back to the company, through buy-out provisions in the corporate agreements, selling her interest to an outside party, if the corporate agreements allowed such a sale, or seeking relief as a dissenting shareholder, taking advantage of relief provided by state statutes. In all three of these alternatives, Diane would need to determine the relative worth of her business interest. Since the value of a business interest depends upon the overall assumptions used in its determination, with said assumptions representing what are known as “standards of value”, it is imperative that Diane understand the applicable standards and the extent to which they may apply.
For example, the buy-out provisions may require that the interest be valued under the “fair market value” standard of value, which typically assumes a hypothetical sale of the business interest. In the alternative, if the corporate agreements allowed Diane to sell her interest to an outside party, she may want to value the interest under the “investment value” standard of value, which can take into consideration a specific buyer and any synergies that might flow to that specific buyer upon their acquisition of her interest. Then again, if Diane seeks relief under dissenting shareholder statutes, she may need to have her business interest valued under the “fair value” standard of value, which might preclude certain transaction discounts that might otherwise apply.
For more information regarding business valuation, please visit our services page or contact us for assistance with a specific issue.
How did your garden grow?
Fact Pattern –
Lawrence was going through a divorce and facing a financial predicament. When he and Mary had married 11 years earlier, they’d each brought separate property assets into the marriage. At the time of marriage, Lawrence had owned a controlling interest in a company that was developing mixed reality technology and Mary had sizeable investments in various money market accounts and stock portfolios. During the period of marriage the company had grown significantly, in large part due to Lawrence’s efforts and to cash infusions from Mary’s separate property, and had also diversified from focusing on software to concentrating on both the development of software and the manufacture of compatible hardware.
Further, when cash flow was tight during the early years of marriage, Mary had frequently transferred funds back and forth between her separate property accounts and various community accounts. Some of these funds had also contributed towards the acquisition of a vacation home.
Now that Lawrence and Mary were going through the divorce process, they needed a tracing of funds to ascertain the extent to which Mary’s separate property holdings had been commingled with community funds. They also needed to determine the value of the community’s interest in the mixed reality company and the extent to which Mary may have had a separate property interest in the vacation home.
Important Considerations –
In a situation such as this one, it may be necessary for a forensic accountant to trace the funds that were transferred between community and separate property sources. Such an analysis should ultimately determine the extent to which commingling has occurred and provide a reasonably supported methodology for apportioning the current account balances, and values for assets such as the vacation home, between community and separate property. Since the value of the mixed reality company increased during the marriage as a result of both community effort and separate property contributions, the portion of the business value that is attributable to the community will require analysis of Lawrence’s reasonable compensation, an understanding of the drivers behind the company’s growth, and a reasoned assessment of the usefulness of cash infusions received from Mary’s separate property funds.
For more information regarding business valuation, please visit our services page or contact us for assistance with a specific issue.
Weathering the storm…
Fact Pattern –
Kim had been a lawyer for over 20 years, and had owned her environmental law firm for the last 12 years. Since her firm had an in-house bookkeeper and an outside tax accountant, she’d essentially disregarded the distinction between business and personal account spending, assuming that her “accounting team” would put things in the right place. Unbeknownst to Kim, her bookkeeper had just been recording expenses as “business-related” if they were paid by business accounts, which was problematic since payments from business accounts included the monthly mortgage on Kim’s personal residence, family vacations, and a number of personal credit cards. Even worse, the firm’s tax accountant had just incorporated the accounting provided to him by the bookkeeper without any independent assessment of the business vs. personal nature of claimed expenses.
Since Kim is now looking to bring on a partner, and the firm’s operating agreement stipulates that the buy-in price for a potential partner will be based upon fair market value, she needs to have the firm valued. However, during the due diligence process it became apparent that any business value based upon uncorrected financial statements would be significantly understated because of misleading net business income (when business expenses are overstated, business net income will be understated, all else being equal).
Important Considerations –
In a situation such as this one, since the commingling of personal and business expenses have resulted in historical financial statements that do not correctly reflect the firm’s actual operations, the business valuation process will require forensic accounting to normalize the financial statements for comparative purposes. The normalization process will attempt to remove personal expenses, remove nonrecurring or extraordinary items, and remove other non-business items. The normalization process will also enable the assessment of representative earnings, which will be used to support and/or contrast projections of future operations.
The level of detail that is examined during the normalization process will depend upon the scope of engagement (such as the period of historical time to review or the types of items to review), the availability of supporting documentation for claimed business revenues and expenses, and the period of time available for the analysis.
For more information regarding business valuation, please visit our services page or contact us for assistance with a specific issue.