Whether valuators of businesses should “tax-affect” or “not tax-affect” an S corporation’s earnings is a controversial issue. The Internal Revenue Service is increasingly scrutinizing taxpayers and their business valuators fail to address the tax-affecting issue in valuations of S corporations. Any valuation of an S corporation (or other pass-through entity) should consider specific adjustments that recognize the tax differences between S corporations and C corporations. The Tax Courts nor the business valuation community have not recognized a “peer reviewed and tested S corporation valuation model” that addresses the tax attributes of…

Typically, buyers prefer asset sales, whereas sellers prefer stock sales. Buyers like the enhanced tax benefits of asset sales and the less exposure to corporate liabilities, and sellers like stock sales due to less income taxes. An asset sale is the purchase of an aggregation of individual assets. A stock sale is the purchase of the shares of a corporation. In an asset sale, the seller retains possession of the legal entity and the buyer purchases the individual assets of the company, such as equipment, fixtures, contracts, licenses, goodwill, and inventory….

…but you have inadvertently positioned yourself to be a one-person Deal Killer for, what could be, your most important deal in years? Your decision to sell your business to outsiders or to new partners may be motivated by a variety of reasons, including your age, business stagnation, boredom, a desire to sell at the peak, or a desire to move your residence. Or, you may have been approached by a competitor or investor desiring to acquir your position in the marketplace. Since your business is privately-held and the value of…

The issue of solvency, and insolvency, frequently arises in bankruptcy matters where a claim is made that one party (the debtor) made a transfer (while insolvent, or which transfer caused insolvency) with the intent to hinder, delay or defraud a creditor. Of course, the debtor typically claims that the transfer was made in good faith in the ordinary course of business for consideration of a reasonably equivalent value. At law, the solvency, or lack thereof, of the debtor is an economic question. Also in question is whether the transfer caused,…

The courts, especially the Tax Courts, have frequently employed hindsight to help establish and adopt fair market values for businesses and assets. Hindsight evidence is facts and circumstances that only became known after the valuation date. In many cases, the courts have taken such actions because the business valuator (or real estate appraiser) brought to the court an inadequate report on fair market value. The court, faced with a void in reliable and credible valuation information, had to make a reckoning of value. The court reckonings were, sometimes, based on…

Individuals and legal entities that own interest in businesses find it relatively easy to separate the various rights that ownership in an entity represents. One example of such a division is the transfer of voting rights in common stock from the individual owner of the common stock to another party. This can be done by a proxy. Or, the voting rights for the owner/partners may be allocated in a limited partnership agreement. Notwithstanding the legal mechanism for a division of a voting right, when a party is relieved of such…

1. THE TAX RULES: The tax rules did not allow amortization (i.e. the ratable expensing/deducting) of Goodwill until 1993 (actually, after 8/10/93). With minor exception due to transition tax laws in 1993, if a taxpayer made an acquisition prior to 1993 that gave rise to Goodwill, the Goodwill was not deductible and was forever left on the Balance Sheet, for tax purposes. Starting in 1993, the Internal Revenue allowed Goodwill that arose from an acquisition to be amortized (expensed/deducted) ratably over 15 years on a tax return; at the same…

The Hancock Firm regularly values debt issued by privately-held companies and other commitments or contingencies involving the private company. When the subject company has financial statements that have been reported upon by independent accountants or auditors, substantive insights into the obligations or alleged obligations may be ascertained. For example, take the following edited excerpt from a report issued by The Hancock Firm. In a writing dated August 31, 2008, XYZ, Inc. granted to EFG, Inc. the right to contingent financial awards. The right is non-interest bearing. The term of the writing…