John Ciavarella CPA, PC has performed hundreds of valuations for companies ranging from sole proprietorships, partnerships, to corporations with values extending to 300 Million Dollars of Invested Capital. John Ciavarella CPA, PCs engagements have ranged from serving small private businesses to mid market privately held companies with revenues up to 250 Million; from common stock to partnership interests to intangible assets.
John Ciavarella CPA. PCs appraisals are well written, thoroughly documented, and free of “boiler plate” language which allows the reader, whether it is the IRS, trial attorneys, or a judge to recognize the business interest being valued as well as understand the valuation methods and approaches employed in the subject company appraisal. The valuation reports are also written to comply with the business valuation standards promulgated by the American Institute of Certified Public Accountants (AICPA), American Society of Appraisers (ASA), and the Uniform Standards of Professional Appraisal Practices (USPAP). Compliance with the above mentioned valuation standards allows John Ciavarella CPA, PCs ability to support and defend the valuation conclusion under challenge and is a fundamental premise that is built into each appraisal engagement.
Taxation valuation services are performed for various purposes including, but not limited to the following:
Gift and Estate Tax Planning/Settlement:
Succession planning and family wealth transfer are major issues for the World War II Greatest Generation and their “Baby Boomer” children. When it is time to transfer ownership to minimize the tax impact while minimizing the emotional impact issues related to the generational transition, a careful process must be followed to manage the tax impact and reduce the possibility of a successful IRS challenge.
Gifted or bequested assets must be assigned a value for federal transfer tax purposes. The IRS may assess penalty taxes on estates that undervalue its assets for estate tax purposes. The basic key to not having theses penalties assessed is to have a thorough well written and documented appraisal report that is free of boiler plate language and performed by a credentialed, experienced, independent appraiser who complies with the applicable business valuation standards.
Family Limited Partnership (FLPs):
Family Limited Partnerships have been an excellent and estate tax planning tool for tax minimization and family wealth management. Typically, assets such as real estate and marketable securities are contributed to the FLP by senior members of a family who then create a small general partnership and a large limited partnership interest. These senior family individuals then gift the limited partnership interests to the junior family members at a discounted value to accomplish transfer of interest goals.
Although the use of FLPs has been gaining favor in estate and family wealth planning, this alternative has come under increasing legal attack from the Internal Revenue Service. The key concept in utilizing these entities for estate planning and wealth transfer is to retain qualified and experienced legal counsel who can design the appropriate partnership agreements. Valuation expertise is equally important to compute, document, and be available to defend the discounts. It is widely recognized that the Internal Revenue Service considers the professional credentials and experience of the appraiser as well as the quality of the report submitted in determining which FLP valuations to challenge.
Creating and Updating Shareholder/Partnership Agreements:
It is critical to address valuation issues at the inception of a business. Every business that has multiple owners should have an agreement that defines how the business is to be run as well as clearly defining what happens when shareholders/partners die, get divorced, become disabled, want to leave the business, or disagree. John Ciavarella CPA, PC can help you and your attorney define the terms of such agreement that relate to valuation issues upon one of the above mentioned events or situations as well as adjustments in the agreement when business situations change.
Examples of issues that need clarification include, but are not limited to:
- How to value a minority interest
- How financial statements will be referenced in determining value (no of years, month or quarter end) and weighting of the financials.
- Whether book value refers to include tangible and intangible assets
- Whether to use book value or market values for assets of the business
- Whether earnings on the income statements are adjusted when the business has used techniques to minimize income taxes.
Updating agreements as businesses change over time (usually annually):
- Is the agreement still fair and appropriate?
- Is the stipulation for determining value produce a fair outcome for the shareholders/partners?
- Is the stipulation for determining value reasonably expected to be accepted by the Internal Revenue Service for gift and estate tax purposes?
- Have additional entities been formed to own and lease assets such as real estate or equipment to the business?
When a shareholders/partners agreement fails to reflect the most current economic situation of a business or is not clearly worded, the parties to the agreement often revert to litigation which usually creates significant distractions from the business needs, professional fees, and hard feelings. The point to remember is that all is well at the inception of a business venture with multiple owners, but circumstances do change as time progresses.
S Corporation Conversions:
The Internal Revenue Code permits a corporation that pays taxes on its income (C Corporation) to convert to a type of corporation that passes through the income or loss out to its shareholders (S Corporation). However, at the date of conversion from C to S type of corporation, the Internal Revenue Code requires that entity to value all of its assets (tangible and intangible) at fair market value. This process typically includes the following:
- Obtaining a fair market appraisal by a credentialed appraiser (utilizing Uniform Standards of Professional Appraisal Practices-USPAP) qualified to value the following purchased assets and liabilities:
Real Estate held by the corporation
Equipment utilized in the corporate operations
Mineral and geothermal holdings
Intellectual property assets such as patents and trademarks
- Adjusting certain assets to their net realizable value such as:
- Adjusting certain liabilities to their net realizable value such as:
Accounts and accrued payables
Litigation claims and assessments
When this process has been completed a credentialed business appraiser utilizing the underlying fair market values of the above mentioned assets and liabilities, will need to perform a full comprehensive valuation of the business utilizing the appropriate methods and approaches meeting the guidelines of Revenue Ruling 59-60 to derive the value of other non-purchased intangible assets such as but not limited to workforce-in-place and goodwill.
Once the credentialed business appraiser determines a comprehensive opinion of value, the Internal Revenue Code mandates that each of the companies purchased and non-purchased assets be assigned a “built-in gain or loss” which is the difference between the fair market value and the original cost basis of the related asset. The sum total of all of the company’s assets is the total net “built-in-gain.” If the corporation disposes of any of these assets (to include the entire business unit) within a ten year period subsequent to date of conversion from C to S status, then the corporation (not the shareholder) will pay income taxes on any gain related to such sale.
Disputes that arise in business ultimately must be resolved. Legal counsel leads the litigation team’s strategy, they often and require expert support. We provide litigation support services for many phases of the litigation engagement, form pretrial research and analysis to expert witness testimony.
Successful litigation support begins with qualifications and credentials. The opposing counsel’s first line of attack frequently is to attempt to undermine the credibility of the other expert. Because John Ciavarella CPA, PCs principals hold senior valuation designations and possess extensive valuation and litigation support experience, our credibility can withstand challenge.
Extensive experience enables an appraiser to provide maximum benefit to legal counsel in pretrial research, advice, and analysis. Attorneys frequently lack expertise in financial or strategic issues and must rely on the expert at trial and for assistance in advance. Legal counsel also must be confident that their expert can perform under pressure and within deadlines.
The following are some of the more frequent services that we provide in a litigation setting:
Preliminary appraisals are quicker and less expensive estimate of value which may assist the lawyer in assessing the valuation aspects of a case. Consultation is also available with respect to valuation issues such as the applicability and size of discounts, valuation-specific questions questions for interrogatories and depositions, and other valuation sensitive elements of the case. Such consultation, however, precludes us from testifying as an expert witness, in which we must be objective appraisers.
However, for most litigation matters, an independent and objective appraiser will be needed to issue a report that opines and supports an unambiguous value for a business interest or an asset. We may be called upon to testify in court to support our conclusion against strong adverse scrutiny. We are required by law and our professional standards to provide our appraisal services in a litigation setting in an independent, objective manner with impeachable integrity. As such, an appraisal that favors a client will have no credibility with the judge and jury, and will be damaging to all parties.
If your attorney wishes to hire us as a consultant, we will not be able to testify in court and or work will not be available to (“discoverable by”) the opposing parties. Most of our litigation services described below is provided when we act in this capacity. In no case are we able to act in both situations as a neutral appraiser and a non-neutral (advocate) consultant.
Expert and Rebuttal Testimony:
We are often called upon to provide direct and rebuttal testimony regarding our opinions as well as that of the opposing expert regarding the value of a business interest. This service is only provided when engaged as an independent business appraiser.
Drafting Deposition, & Cross Examination Questions:
We often assist legal counsel in a litigation case in drafting questions to be posed to the opposing expert or principles related to valuation issues.
Critique of Opposing Valuation Expert’s Value:
We often critique business appraisal reports prepared by other experts related to litigation. Our critique comments comments on matters related to the appropriateness of the valuation methods employed, capitalization or discount rate developed to calculate the rate of return for a business enterprise, adjustments to the income stream to be capitalized or discounted, valuation discounts or premiums used in the appraisal, and compliance with applicable professional business valuation standards.
Our critique does not include an opinion of value, however we generally indicate whether the value derived by the other appraiser would be either higher or lower and is provided on a consulting basis.
The end of a marriage is an emotionally charged situation in which there is often wide disagreement between the parties to the divorce regarding the valuation of a business or professional practice. We are frequently retain by both the petitioning and defending parties or appointed by the court to deliver an independent opinion of value. The neutral role has the potential to save money, time and emotional distress for all concerned. However, if the valuation is expected to be contested, we have been extensively trained to and are experienced as expert witnesses.
There is considerable variation in the way the various courts in different jurisdictions interpret which business assets constitute marital property subject to division and how they are to be valued. The following questions may be answered differently form one court or jurisdiction to another:
- Is the value to be determined by the value to a well-informed arm’s length buyer (fair market value) or the value to the spouse who will retain the business or professional practice?
- Is goodwill or other intangible assets marital property subject to valuation and equitable division with the other assets owned by the couple? Which portions of the intangible assets are transferable and non-transferable?
- If the business or professional practice predates the marriage, does the value of the business at the time of the marriage remain the separate property of one spouse with the marital asset limited to the value change during the marriage?
- To what extent should valuation discounts be applied to the business interest owned by the marital estate?
- If the business has performed poorly since the separation, was it as a result of the distractions of the marital dissolution of have business conditions changed, and how does these situations affect value?
- What is the proper (required) date of the business or professional practice valuation?
Marital dissolution valuation issues are varied and sometimes complicated and appraisals usually focus on two complex areas:
- The value of goodwill (enterprise and personal or professional)
- Valuation discounts
Goodwill is an intangible (invisible) asset and does not appear on the financial statements of the business or professional practice. It consists of components made up of the reputation of the business and its employees, owner’s, its trade secrets, location, and many other factors. It may or may not be a marital asset, and that is a legal issue to be determined by the legal counsel and the courts.
In a similar vein, business interests of less than 50% often lack control over the direction and course of a business and thus, there is no market for such an interest. Often these business interests are reduced or discounted to reflect the impaired value. We have extensive experience in valuing such interests and applying the appropriate discounts when applicable.
Dissenting and Oppressed Shareholder/Partner Matters:
Conflicts often arise between shareholders or partners regarding the direction of the business and the duties and responsibilities of the individuals. Most states have statutes that grant the minority shareholder or partner dissenting or oppressed protection rights when those in control of the business take action that maybe detrimental to the minority business entity holder.
The minority business interest holder may file legal action to have their interest repurchased at fair value, the standard used by most states and jurisdictions in these matters.
Fair value is determined as the value of the interest immediately before the effectuation of the action to which the dissenter objects excluding and appreciation or depreciation in anticipation of the action unless the exclusion would be inequitable. This determination of dissenting or oppressed status only address the date of the value, it leaves the standard of value to the courts.
Valuation Services-Compliance and Financial Reporting:
Employee Stock Option Plans (ESOPs)
ESOPs offer tax benefits to the sponsoring company and its selling shareholders. Although there may be restrictions, ESOP tax advantages include, but are not limited to the following:
- Contributions of cash or company shares may be tax deductible
- Dividends paid on ESOP shares may be tax deductible
- The principal as well as interest paid to banks on ESOP loans may be tax deductible
- Selling shareholders are able to defer capital gains and taxes on the shares sold to the ESOP in order to fund the ESOP with company shares
The Department of Labor in conjunction with the Internal Revenue Service requires that the ESOP shares be valued every year by an independent business appraiser. This appraisal is usually done at the company level with emphasis on the shares held by the ESOP. These valuations often have complexities that are unique to the ESOP features.
Financial Reporting-Intangible Assets and Goodwill:
Financial accounting rule changes in 2001 require that the purchase price in a business combination transaction be allocated to the target company’s tangible and intangible assets under SFAS 141. In addition any resulting goodwill that is recorded as a result of a business combination under the rules of SFAS 141 must be tested annually for impairment under the rules of SFAS 142.
Financial Reporting-Stock Based Compensation:
- SFAS 123R requires companies to reflect the fair value (as opposed to intrinsic value) of options granted to employees as an expense to financial income results of the entity.
- Internal Revenue Code Section 409a provides an expansive definition of deferred compensation to include discounted compensatory stock options and stock appreciation rights. That is, it applies to stock option having an exercise price that is less than the stock’s grant date fair market value. Important issues are raised as to how private, venture-backed companies value their common stock.
- To value the options under IRC 409a, the fair value of the Company’s total equity (common and preferred) must be determined. The total equity value must then be allocated to the components of equity (i.e., common and preferred).
Types of Valuations Engagements:
Full or Comprehensive Appraisal:
The objective of this type of appraisal is to express an unambiguous opinion as to the value of the business, ownership interest, which is supported by all of the procedures that the appraiser determines to be applicable to the valuation.
- All relevant information is considered by the appraiser
- The appraiser collects and analyzes all information expected to be applicable to the valuation assignment.
- All conceptual approaches and methods of deemed to be relevant by the appraiser is considered and utilized in the subject company appraisal engagement.
This type of appraisal is mandatory for all valuations performed for tax, litigation, financial reporting, and ESOP purposes.
The objective of a limited appraisal is to express an estimate as to the value of the business or business interest. This type of appraisal lacks some of the additional procedures required of a full or comprehensive appraisal.
- Limited relevant information is considered.
- The appraiser conducts only limited appraisal procedures to collect and analyze information expected to be relevant to the appraisal engagement.
- Only those conceptual approaches deemed to be most relevant by the appraiser are considered and applied in the appraisal engagement.
This type of appraisal engagement may be used for buy-sell agreements or for help in deciding to purchase a business or business interest.
The objective of a calculation is to express an approximate indication of value based on the performance of limited appraisal procedures agreed upon by the client and appraiser.
- Limited relevant information is considered (usually form financial statements only).
- The appraiser performs a limited process of collection and analysis of financial information.
- The calculation of an approximate value may be based on conceptual approaches and methods as agreed with the client.
NOTE: Based on the three scopes of business appraisal engagements, we can be hired as valuation consultants as opposed to being independent appraisers. However, only in a full or comprehensive appraisal are we providing an unambiguous opinion of value.
Please call us to discuss these types of appraisal engagements further.