Greetings!
Welcome to Business Valuation Issues.
Every quarter, you can expect American ValueMetrics to update you on changes to regulations and court cases that affect business valuations. The information in this newsletter should be a valuable resource to you and your colleagues in your professional practice. |
| Will the Real Appraisal Standards Please Stand Up... |
| As the old Bob Dylan song goes... "The times they are a changin"... in the world of business appraisals. And, in the process, many old shibboleths are being thrown out.
There has been a battle raging over "who promulgates the real standards for business appraisals. And, this battle has escalated in recent years.
USPAP promulgated the standards for appraisals of personal property (i.e. machinery and equipment) and businesses, but they were recommended, and not made mandatory. Thus the subsequent profusion of "standards" in this area. Read more
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| Some Relevant Court Cases and their Significance |
| At American ValueMetrics we are continuously analyzing court cases relevant to business and personal property appraisal to look for guiding principles.
We are also interested in who lost and why they lost -- especially in cases involving the Internal Revenue Service.
Court cases are important because though they may tend to create precedents, in many cases the court has had to decide between two positions, neither of which may be very defensible. We have observed a few basic rules which will enhance your position in court... Read more |
| In a World of Diverse BV Standards, Credentials and Competency are Critical |
| The lack of unified standards has become one of the most controversial - and critical - topics for the business valuation profession. As a result, BV litigation experts may be more susceptible to intense examination regarding compliance with the appropriate professional standard(s), an area they (and their attorneys) should be prepared to expect - and use to their advantage, when cross-examing an opponent's expert.
Standards from diverse sources
Many believe that professional standards for business valuation "began" with IRS Revenue Ruling 59-60. Issued in 1959 and applicable by law to federal estate and gift tax valuations, Rev. Ruling 59-60 still remains the seminal guidance on valuation of ownership interests in closely held businesses. Read more |
| Does Fair Value of FLP Include Marketability and Minority Discounts? |
| The Winn family limited partnership (FLP) managed 880 acres of timberland, which had been in the family for a century. The partnership agreement provided that upon withdrawl, a member was entitled to receive the interest's "fair value." When several minority members withdrew, they disputed the appraised value of the partnership as well as the application of discounts to their minority interests.
At trial, the partners presented a forester and certified general real estate appraiser, who valued the land and timber at $1.9 million. He did not apply discounts because they were not "part of the scope of his work." The partners also enlisted a certified business appraiser; he also had not been asked to apply a discount, nor did he believe one was appropriate. Read more |
| Error for Court not to Specifically Account for Enterprise Goodwill |
| The decision by the West Virginia Supreme Court of Appeals in May v. May (2003) is becoming increasingly well known for its comprehensive survey of national case law regarding the distinction between enterprise and professional goodwill in marital dissolution cases. More recently, the same court issued its opinion in Helfer, clarifying the need for trial judges to make a complete record regarding the valuation of the specific components of goodwill. Although not binding on other jurisdictions that follow the current majority rule (which makes the distinction), Helfer suggests that by articulating the specific findings regarding the values of enterprise and professional goodwill, family courts can avoid reversal on appeal. Read more |
| For Complex Valuation of Food Franchises, Court Adjusts Income Approach |
| Five years before this Tennessee couple divorced, the husband formed a partnership with his father to acquire and operate McDonald's franchises. The husband owned a 90% interest, but both partners had equal management rights, including any decision to sell. Their buy-sell agreement established a purchase price at book value; alternatively, the partners could liquidate.
A year prior to the divorce, the partnership acquired seven franchises for a total of $2,345 million. To raise his 90% share, the husband borrowed $124,200 from his father - a debt that remained outstanding at the time of divorce. The father, who owned/operated fourteen other McDonald's through a separate entity, provided management services at no charge.
Pursuant to the particular franchise agreements, the McDonald's Corporation owned the underlying real estate and rented it to the franchisee. Strict guidelines prohibited the sale of any franchise without McDonald's consent. The partnership was also obligated to rebuild one of the franchises in its entirety, at an estimated cost of $950,000. Read more |
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| HAVE A CLIENT THAT NEEDS A BUSINESS OR EQUIPMENT APPRAISAL QUOTE? |
and fill out the quote request form or call 805.646.4960 to speak with a valuation expert and receive a quote today for your client. |
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| Appraisal Factoids |
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1. Is a lack of marketability discount always 35%?
No, a complete analysis should be done to determine the marketability discount.
2. When does book value = fair market value?
Never
3. Is a 50% interest in a company a majority interest?
No |
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