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New York City Business Valuation

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Practice Areas
New York City Business Valuation
How much is that business worth?
Your focus should be on the case at hand. Let us do the heavy lifting. Whether it is a business owner deciding to divorce, two shareholders disputing one another's pay, or you simply need to know a business' value for tax purposes, call our firm for a business valuation.

But where to begin? How do you comb through the finances and complex arrangements that make up a business? How do you take all that information and determine a correct, unbiased business valuation?

Undergoing a business valuation can add further headaches to an already delicate circumstance. Nonetheless, a correct business valuation is immensely important. The IRS, or worse, your client, will not be very forgiving when the business valuation is incorrect. To save time and money, your New York City business valuation professional must be carefully selected.

That is where a business valuation from MSG can help.

Knowledgeable Professionals with Extensive Experience

At MSG, our firm's knowledge of forensic accounting, taxation, and economics ranks us highly among business valuation professionals in New York City and the Tri-State area. We have over twenty-five years of experience and extensive resources to provide an accurate and in-depth valuation. Every business, like every person, is unique. At MSG each client receives an independent business valuation and a customized approach to their particular case.

Many factors of value go into calculating an accurate and supportable valuation. We use our comprehensive knowledge of valuation methods to find what works best for the business in question. We refer to our industry-specific valuation models to see where the business stands among its peers. And then, we analyze the data, using our understanding of what constitutes a company's true financial performance, to cut through the numbers and arrive at an accurate and verifiable value.

An Analysis Tailored to Your Needs

Depending on your needs, our firm can prepare a full written report, or we can produce modified reports for any specific business transaction or litigation matter. We tailor our forensic investigation and analysis to your specific requests.

Valuation of a business always constitutes a significant undertaking. We know you don't have the time or money to waste on a poorly calculated valuation. That is why MSG consistently provides independent, knowledgeable, and credible work product. With us, you can withstand the intense scrutiny of your adversary.

So, how much is that business worth? Ask us.

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New York City Business Valuation Analyst | Mark S. Gottlieb

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Practice Areas How much is that business worth? Your focus should be on the case at hand. Let us do the heavy lifting. Whether it is a business owner deciding to divorce, two shareholders disputing one another's pay, or you simply need to know a business' value for tax purposes, call our firm for a business valuation.

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Business Valuation Calculator View Results

What is the value of my business?

Similar to bond or real estate valuations, the value of a business can be expressed as the present value of expected future earnings. Use this calculator to determine the value of your business today based on discounted future cash flows with consideration to "excess compensation" paid to owners, level of risk, and possible adjustments for small size or lack of marketability.

Calculate

This information may help you analyze your financial needs. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Hypothetical illustrations may provide historical or current performance information. Past performance does not guarantee nor indicate future results.

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Business Valuation Calculator View Results Similar to bond or real estate valuations, the value of a business can be expressed as the present value of expected future earnings. Use this calculator to determine the value of your business today based on discounted future cash flows with consideration to "excess compensation" paid to owners, level of risk, and possible adjustments for small size or lack of marketability.

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The Valuation Impact the Coronavirus will have on Closely-Held Businesses

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The Valuation Impact the Coronavirus will have on Closely-Held Businesses

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MLB has postponed the start of its season. Public & private schools around the country are closing. Locally, the NYC St. Patricks' Day parade and other large public gatherings are canceled, amongst the rumors surrounding that the city will order a mandatory quarantine.
These are just a few of the headlines we have heard and read this week in response to the current coronavirus pandemic.

The health of our family, friends, and neighbors is paramount at this time. Still, as the stock market seems to be in freefall, one can only wonder what impact the coronavirus will have on the short-term and long-term valuation of closely-held businesses.

The micro and macroeconomic communities have experienced this turmoil before. Of course, there was 911 and the financial crisis of 2008, but when was the last time the spokes on the economic wheel have slowed down or stopped because people were either too sick to work or discouraged from going to work? Yes, many of us will be able to work from home; but let's be honest - it will not be the same.

Local restaurants and attractions expect to see a drastic decrease in business; the travel and hospitality business is flooded with cancellations, despite offering services at unheard-of low prices. (Someone told me you could fly to Florida this weekend for $50.)

If you are one of our frequent readers, you are familiar with the three general methods of valuation, the asset, market, and income approaches. The asset approach examines the net book value of the business at a given point in time. The market approach determines value by examining sale transactions of similar companies. As of today, the effects of these two approaches resulting from the coronavirus cannot be quantified. However, the income approach is primed to address the impact of the current pandemic.

Simply stated, the income approach considers three factors to determine value, cash flow, growth, and risk. Each of which may or perhaps will, be affected by current events.
Cash Flow
Cash flow is defined as the earnings stream the business expects to generate in perpetuity. Whether it is determined from historical or prospective anticipation, it is based on the analyst's review of the subject's operations. In some instances, these results may be adversely affected or expanded from the effects of the coronavirus. For example, the subject may become a manufacturer or supplier of a product or service that will be regularly used. Alternatively, individual businesses may be affected by a temporary or permanent loss of income.
Growth
Growth rates measure the expected growth rate applied to subjects' cash flow. It is intended to include the sum of both inflation and real growth. Growth is significant to a hypothetical investor/buyer since it often used to quantify their future expectations. A pandemic like a coronavirus may have both short-term and long-term growth affects - particularly if it initiates an economic recession.
Risk
Even under normal conditions, the evaluation of the subjects' risk is often a critical part of the valuation analysis. Risk has a direct effect on the valuation multiple. The higher the risk, the lower the valuation multiple used in the income approach.

Risk is an expression of the analyst's judgment as no empirical evidence or database exists, or can exist, to measure the company-specific risk drivers. The analyst must identify material, specific company risk drivers, and judge their magnitude to estimate the additional incremental rate of return the market would require to offset the acceptance by the investor of that additional risk. The factors and extent which comprise this component will vary from company to company, among industries, and over time within the same company. Before the coronavirus pandemic, we generally considered the depth of management, the importance of key personnel, the stability of the industry, diversification of product or service, diversification of vendors, geographic location, and earnings margins to be these main risk drivers. Now we have to also consider the effects of the business due to the coronavirus.
Conclusion
As of today, it may be too soon to say what the long-term effect the coronavirus will have on our economy or the valuation of closely-held businesses. What we do know is that investor confidence, consumer consumption, and the civic/municipality response have yet to be fully determined. In other words, we just have to wait and see. The immediate issue may be how closely-held businesses can marshall their current resources to support themselves in the short-term.

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The Valuation Impact the Coronavirus will have on Closely-Held Businesses - Mark S. Gottlieb

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The health of our family, friends, and neighbors is paramount at this time. Still, as the stock market seems to be in freefall, one can only wonder what impact the coronavirus will have on the short-term and long-term valuation of closely-held businesses.

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1430 Broadway, Suite 902
New York, NY 10018

Hours: Mon-Fri 9am-5pm
Saturday by appointment

Phone: 646-661-3800

https://www.msgcpa.com

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Valuation Standards

Valuation Standards provide the guidelines for valuing property in New York State for ad valorem real property taxation. While the primary purpose is to define and document the standards followed by the Office of Real Property Tax Services, they may also be useful in documenting the broad standards used by the assessment community in New York State. They are based on a compilation of requirements from legal, the Uniform Standards of Professional Appraisal Practice, statistical and professional appraisal perspectives. The legal perspectives are based on federal and state laws, precedent setting case law, rules and regulations, and opinions of counsel from the Office of Real Property Tax Services. The Uniform Standards of Professional Appraisal Practice (USPAP) are the established requirements for professional appraisal practice, which include the minimum foundation on which both the development of an appraisal and a reporting of the results must be based. Statistical perspectives are critical to the accurate interpretation of data and the development of assumptions made to reach a value conclusion.

Since the specific focus of these standards is the valuation of real property for ad valorem real property taxation in New York State, the primary emphasis is on mass appraisal, as set forth in USPAP Standard 6 Mass Appraisal, Development and Reporting. However, since all real property must be valued to ascertain its share of the tax levy, including unique properties, individual property appraisal standards are also necessary. Mass appraisal and individual property appraisal standards should complement each other. Appraisers often use both or a hybrid of individual and mass appraisal processes to value real property for ad valorem taxation to optimize the efficiency and effectiveness of their valuation process. The use of mass appraisal is contingent upon the homogeneity and frequency of similar property occurrences, not solely the property type. For example, an architecturally unique single family residence may require an individual property valuation while a industrial warehouse may be valued effectively using mass appraisal standards.

Ethical standards for valuation as described by the Uniform Standards of Professional Appraisal Practice (USPAP) are divided into four categories: Conduct, Management, Confidentiality, and Record Keeping.

Conduct: Acting as a disinterested third party, the assignments should be performed with unbiased impartiality, objectivity and independence. Any action should be avoided which may be considered misleading or fraudulent or to knowingly permit an employee to communicate a misleading or fraudulent report. Unsupported conclusion relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance, handicap or other such characteristics must not be made.

Management: Acceptance of compensation that is contingent on reporting a predetermined value or direction in value, attainment of a stipulated result, or the occurrence of a subsequent event is unethical. [Note: Administrative override of value estimates is a management prerogative and doesn't violate the appraiser's responsibilities unless the appraiser is asked to take responsibility for the value override.]

Confidentiality: An appraiser must protect the confidential nature of the appraisal assignment.

Record Keeping: An appraiser must prepare written records (data and information to support the findings and conclusions) ...and retain such records for a period of at least five years after preparation or at least two years after final disposition of any judicial proceeding involving those records, whichever expires last. Other requirements may be specified under the records and information management policies of New York State.
THE VALUATION PROCESS
The Office of Real Property Tax Services, in order to maintain a high level of professional practice, observes the USPAP Standards unless there are jurisdictional exceptions.

USPAP 's Standard 1 states:

"In developing a real property appraisal, an appraiser must identify the problem to be solved and the scope of the work necessary to solve the problem, and correctly complete research and analysis necessary to produce credible appraisal."

This standard follows the appraisal process, which is a systematic method of collecting, analyzing, and processing data into well-reasoned value estimates.
The Appraisal Process
Definition of the Problem
Preliminary Analysis, Data Collection and Analysis
Approaches to Value
Reconciliation and Final Value Estimate
Report Preparation

1. Definition of the Problem
The valuation process indicates a pattern to be followed in gathering, analyzing and applying pertinent information to establish a property value. The first step in the valuation process clarifies the problem. To accomplish this, one must identify: the real estate, the property rights to be valued, the intended use of the appraisal, the date of value estimate (and inventory), the definition of value, and any assumptions or other limiting conditions.
Identifying the Real Estate
It is most critical for real property taxation purposes that the real property being valued is identified through a cross reference to the assessment roll known as a parcel identification number (PIN). The most common property identification number is the unique tax map land parcel number corresponding with the section-block-lot (SBL) from tax maps that must be maintained annually. Oil and gas rights or mineral rights are often linked to the physical site of withdrawal. The minimum parcel identification required on all real property for valuation purposes is the parcel identification number (usually the tax map section-block-lot (and suffix where required)).
Property Interests and Rights
The property interests and rights to be appraised are also a critical part of the problem definition. In most cases, the real property is valued assuming fee simple estate, unencumbered, with all property rights included. On specific property, however, lesser ownership must be valued with a manual override or modification of mass appraisal indications of value (e.g., severed oil and gas rights, mineral rights, easements or conservation easements, contracts, covenants, declarations or ordinances). In a value estimate for a partial interest, direct market evidence is sought to reflect market attitudes toward that partial interest because the sum of the partial interests may not be equal to the fee simple value. Unless otherwise stated or specifically identified, all real property is assumed to be valued as fee simple ownership in a mass appraisal process with partial rights handled on an exception basis where necessary.
Valuation Date
For real property tax purposes in New York State, the date of value is intertwined with the taxable status date. This presents a special valuation problem that must be clearly identified. "The taxable status of real property in cities and towns shall be determined annually according to its condition and ownership as of the first day of March and the valuation thereof determined as of the applicable valuation date." This has been interpreted to mean that "...the valuation of property is determined by its state as of the taxable status date, and may not be assessed on the basis of some future contemplated use." Thus, the courts are requiring "current use" valuation, which for certain properties may differ from market value based on highest and best use.

Court decisions on ad valorem taxation valuation issues often relied on precedents set in Eminent Domain proceedings. However, courts contrasted Eminent Domain taking where the owner had only one chance to be compensated for value and potential future uses should be considered from value for assessment purposes where the value is evaluated annually. "The valuation of property is determined by its state as of taxable status date, and may not be assessed on the basis of some future contemplated use" Anticipated public and private improvements, located on or off site should only affect the value if general market actions reflect such anticipation as of the date of the appraisal.
Highest and Best Use Analysis
Following the data collection and preliminary analysis the valuation process normally requires a highest and best use analysis. As previously mentioned, courts have held that a distinction exists between condemnation proceedings where property owners are only allowed one chance to be compensated for the value of their property and real property taxation in which values are established annually and generally impact tax allocation or other value related decisions until the follow year when new values are determined. State courts require that the value to be determined should be the value in its "current use". However, in most cases, the current use of the property that must be valued for ad valorem taxation is also its highest and best use. The distinction is only important in sub-optimal use situations. For example, it would be inappropriate to use land sales bought for other than farm use in the direct sales comparison approach to value farmlands since the sale do not reflect the farm use.
Real vs. Personal Property Special Conditions
Any special limiting conditions that could affect the valuation process must be identified.
"Valuation of "Specialties"
Specialty property must be valued at reproduction cost new less depreciation (RCNLD) specialty property must meet four criteria:

1. The improvement must be unique and must be specially built for the specific purpose for which it is designed;

2. There must be a special use for which the improvement is designed and the improvement must be so specially used;

3. There must be no market for the type of property... and no sales of property for such use; and

4. The improvement must be an appropriate improvement ... and its use must be economically feasible and reasonably expected to be replaced.

A specialty may be best defined as a structure, which is uniquely adapted to the business conducted upon it or use made of it and cannot be converted to other uses without the expenditure of substantial sums of money. Special use in itself is not enough. Nor is the fact that the structure has unusual features. There are special valuation rules required by case law for certain specific types of property, which are worth discussing.
"Court Order Assessments"
Where a trial occurred and the judge rendered a decision "on the merits of the evidence", the full value of the property determination by the court should be accepted as binding by ORPTS.

1. The value would be accepted by ORPTS once litigation was final and no "notice of appeal" was filed.

2. ORPTS full value would be fixed for the legal duration of the court's order which pursuant to RPTL 727 is "frozen" for three years, in all assessing units except New York City and Nassau County, (subject to specific exceptions such as physical changes in the property ...), and

3. ORPTS would be free to change the full value when the order expired.

Values resulting from settlements of any other type or assessments effectively sustained due to dismissals on procedural technicalities would not be binding on ORPTS.

However, where parties to a settlement exchanged appraisals, the data and analyses presented therein may provide more information upon which valuation conclusions may be based. We encourage the sharing of the court-ready appraisals with ORPTS for their review and consideration of the contents of these appraisals in their valuation work to minimize the chances of vastly divergent conclusions of value based on fundamental differences in valuation information or methodology.

2. Preliminary Analysis, Data Collection and Analysis
Inventory records for residential, farm and vacant sample and sale parcels shall be provided by city, town or county assessing units to the Office of Real Property Tax Services in an Real Property System (RPS) format or other computerized format agreed to by the Office of Real Property tax Services. Assessing units not providing computerized inventory records shall provide inventories for sample parcels and sales on property record cards (Forms RP 3100 and RP 3105) in accordance with procedures outlined in the Assessor's Manual or on property record cards maintained by the assessing unit, accompanied by an explanation enabling ORPTS staff to use the data in RPS.
Avoiding Errors of Omission or Commission
Quoting from Advisory Opinion 2 of the Appraisal Standards Board of the Appraisal Foundation:

"The elements of USPAP relating to inspection of real estate for the purposes of developing an appraisal requires that the appraiser adequately identify the real estate, consider the purpose and intended use of the appraisal, consider the extent of the data collection process, identify any special limiting conditions, and identify the effective date of the appraisal.... The extent and depth of the inspection process varies with the type of property appraised and the conditions of the appraisal.... It is the appraiser's responsibility to determine if adequate information is available about the subject real estate to develop a real property appraisal that conforms to USPAP. An appraiser cannot rationally develop an appraisal if adequate information on the subject real estate is not available. Consequently, where physical characteristics information is not available through an opportunity for a complete inspection or from reliable third party sources, an appraiser has the duty to obtain the necessary information to develop the appraisal before continuing or to withdraw from the assignment.... An appraiser's inspection should, at a minimum, be thorough enough to (a) adequately describe the real estate in the appraisal report, (b) develop an opinion of the highest and best use, when such an opinion is necessary and appropriate, and (c) make meaningful comparisons in the valuation of the property. There are situations where interior and complete exterior inspections are not possible as of the effective date of the appraisal.... where improvements have been destroyed, removed... the appraiser is denied access by the property owner .... Where an interior and complete exterior inspection is not possible for any valid reason, physical characteristic information about the real estate should be obtained from reliable third party sources.... When an inspection was limited, it should be disclosed, but the disclosure does not relieve the appraiser from the responsibility to determine whether ... adequate information is available to develop an appraisal that is not meaningless or misleading".

It is also critical that work should be reviewed for consistency and accuracy to prevent errors of commission. A perfect appraisal model using the appropriate techniques cannot accurately determine the value on a property represented incorrectly by the inventory data. In a mass appraisal process, computer encoded data should be programmatically screened. Extensive use of missing data edits to assure comprehensive collection, range edits on continuous variables and discrete value edits on categorical variables to minimize the possibility of erroneous data, and logical inter-field edits to cross check data for rational relationships are all recommended.

Information used for valuation modeling should be accurate, appropriate and representative. Sales and income data should be verified with a direct party to the transaction where possible. Errors on a subject property will cause one incorrect value, however, errors on sales, income or cost data used to draw valuation conclusions may affect the valuation conclusion on many properties. Data must also be appropriate and representative of the properties being valued. For example, conclusions drawn from single-family market information should not be used to develop conclusions for multi-family housing. More precisely, conclusions drawn from the analysis of average quality single family homes that range from 960 to 2800 square feet are not appropriate for the valuation of an architecturally designed, custom built, single-family residence of 4000 square foot. Conclusions, drawn as a result of statistical analysis and mass appraisal modeling, are inappropriate if the data analyzed does not reflect the population of subject properties to which the valuation results are to be applied. Representativeness is a fundamental requirement of any modeling process.

Negligent or careless work is not permissible. Review and oversight of valuation work by supervisory staff is appropriate and necessary.

3. Approaches to Value
The application of appraisal techniques using the three approaches to value (i.e., cost approach, direct sales comparison approach, and income capitalization approach) will develop separate indications of value for the property.

All three approaches to value, for which adequate, reliable data is available, should be considered. Therefore, where appropriate, the valuation process must collect, verify, analyze, and reconcile the information necessary to estimate; the land value, replacement (or reproduction) cost of the improvements, the accrued depreciation, the value by the sales of comparable properties and the rentals, expenses, interest rates, capitalization rates and vacancy rates necessary to value the property by the income capitalization approach including terms and conditions of available leases. The valuation process must consider existing land use regulations, neighborhood trends, physical adaptability of the property and probable supply and demand as evidenced by current market conditions. It is also important to consider and analyze the effect on value, if any, of the assemblage of various parcels, divided interests, or partial interests. The value of the parcel or economic unit should not be estimated by adding together the individual values of the parcels, divided interests, or component parts.

4. Reconciliation and Final Value Estimate
The ultimate goal of the valuation process is a sound conclusion of value. This requires a reconciliation of the value indications derived from the approaches to value. Consideration should be given to the relevance of the approach and the reliability of the value indication based on the quantity and quality of data available and analyzed within the approaches used. A single market transaction (i.e., sale price), or actual construction cost, or capitalized income stream for a specific property cannot be assumed to be market value. When many sales prices, construction costs or capitalized income streams of similar use properties are analyzed, a conclusion can be drawn as to the market value of a property. Therefore, the quantity of data and the dispersion in value indications is critically important.

Use of multiple independent approaches to value that result in closely clustered value conclusions is usually a sign of sound value conclusions. When value indications are substantially different, careful analysis of the valuation data used and the assumptions made is needed to determine which value indicator is the most reliable. An explanation of the reasoning applied in the selection of the preferred value indicator should be available in the valuation procedures for mass appraisal or in the file documentation for that property. When using mass appraisal, generally accepted testing procedures and techniques should be used to ensure standards of accuracy are maintained.

5. Report Preparation
Report requirements for real property taxation purposes may differ. However, it is important to realize that the credibility of the ad valorem real property tax system depends on reports that clearly communicate the elements, results, opinions and value conclusions accurately and consistently. Documentation for a mass appraisal for ad valorem taxation should include property inventory records, valuation reports, data collection and valuation procedure manuals, statutes, rules and regulations and other references including valuation standards. Information should be readily available to the property owner or for purposes of administrative and judicial review that clearly communicates the derivation of value and relates the value of the subject property to other properties in a comparative way that is understandable and meaningful.

While not required by USPAP, ad valorem mass appraisal documentation should summarize other significant elements of the valuation process. For example, defined procedures should include any assumptions and limiting conditions that result in deviation from generally accepted methods and techniques or that affect analyses. If specific properties require such deviation they should also be identified. Procedures for collecting, validating, and recording data should be well documented. An extensive description of the valuation modeling process is important. The ultimate users of the valuation results should be given: a description and justification of the model specification(s) considered, data requirements, and the models chosen for mass appraisal. Furthermore, valuation reports should include a description of the calibration methods considered and chosen including the mathematical form of the final models; identify appraisal performance tests used and set forth the performance measures attained; and explain any permitted departures employed.

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Valuation Standards Valuation Standards provide the guidelines for valuing property in New York State for ad valorem real property taxation. While the primary purpose is to define and document the standards followed by the Office of Real Property Tax Services, they may also be useful in documenting the broad standards used by the assessment community in New York State.

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Classifying Shareholder “Loans” In Business Valuation

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Classifying Shareholder “Loans” In Business Valuation

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Are loans due to or due from shareholders a bona fide debt obligation, a form of equity capital, or a hybrid of the two? This distinction is relevant when valuing a business - particularly in a shareholder dispute or in a divorce case. I customarily devote a good portion of class time discussing this issue in my class at Fordham Law School. This distinction may cause a material difference in the ultimate valuation of a closely-held business or even the income attributed to its owner. Often, experts turn to the Internal Revenue Service for objective guidance on this issue.
What Would The IRS Say?
Owners occasionally borrow funds from their businesses, say, to pay a child's college costs or provide a down payment on a vacation home. These loans to shareholders appear on a company's balance sheet as a receivable. For loans of more than $10,000, the IRS requires taxpayers to treat the transaction as a bona fide debt. Then the company must charge the shareholder an "adequate" rate of interest. Each month the IRS publishes its applicable federal rates (AFRs), which vary depending on the term of the loan. If the company doesn't charge interest or follow a complicated set of below-market interest rules to impute interest on the loan, the IRS may claim the shareholder received a taxable dividend or compensation payment rather than a loan. The company may deduct the latter, but it will also be subject to payroll taxes. However, both dividends and additional compensation would be taxable income to the shareholder personally. Loans may also be made from the shareholder to the business. These transactions appear as a liability on the company's balance sheet. Interest should also be charged or imputed on these amounts. Interest expense is claimed as income by the shareholder and deducted as an expense by the business.
The Valuation Connection
Classifying debt vs. equity transactions may also be relevant when estimating the value of an equity interest in a business. In some cases, we may decide it's appropriate to reclassify a note to or from a shareholder to the equity section of the balance sheet because management has treated the transaction as a capital contribution, a distribution, or a draw on the shareholder's equity account. In turn, such reclassification may reduce the amount of debt in the company's capital structure, thereby possibly increasing its cost of capital. (That's because the cost of debt is typically less than the cost of equity.) The cost of capital is a key input when applying the income approach. Likewise, when using invested capital methods - which derive preliminary values that include both interest-bearing debt and equity -interest-bearing debt is subtracted to arrive at the value of equity. So, to the extent that shareholder loans have been reclassified from debt to equity, there will be less debt to subtract from the value of invested capital. In divorce cases, the distinction may be particularly important, depending on when an asset was acquired, or a debt was incurred. For example, a marital estate might specifically exclude a business interest that was acquired before the couple was married, but it might include a loan made during the marriage to keep the company afloat during a market trough. Or the marital estate might include loans from the company to pay for a shareholder's personal expenses incurred during the marriage. Matters are more complicated for businesses with multiple owners.
The IRS's Six Factors
When deciding whether payments made to shareholders qualify as bona fide loans, the IRS considers these six factors:

1. Loan size,

2. Earnings and dividend-paying history,

3. Provisions in the shareholders' agreement about limits on amounts that can be advanced to owners,

4. Loan repayment history,

5. The shareholder's ability to repay the loan, based on his or her annual compensation, and

6. The shareholder's level of control over the company's decision making.

The IRS also asks whether the shareholder executed a formal, written note that specifies the repayment terms, such as the interest rate, a maturity date, any collateral pledged, and a repayment schedule.
Debt or equity?
The classification as equity or debt can potentially have a material impact on the overall value of the business. Deciding whether transactions between a company and its shareholders qualify as debt or equity can be somewhat subjective. But the IRS guidance outlines some objective considerations that can be used to support an expert's decision.

If you have questions about this or any other valuation issues feel free to contact me at the above phone numbers. I can also be reached via email at msgcpa@msgcpa.com
VISITOR'S THAT HAVE READ THIS POST HAVE ALSO READ THE FOLLOWING BLOG "Important Valuation Issues In Dissenting Shareholder Cases" Click Here To Read

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Classifying Shareholder "Loans" In Business Valuation - Mark S. Gottlieb

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Valuation professionals must decide whether shareholder loans are bona fide debt obligations, a type of equity transaction, or a hybrid of the two. Debt vs. equity classification has relevance when valuing a business, as well as in divorce cases. This article explains why the distinction matters and what factors the IRS considers when deciding what qualifies as a bona fide loan.

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Economic Recovery Will Be Hard Until These Millions of Jobs Are Safe. Here’s Why.

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Economic Recovery Will Be Hard Until These Millions of Jobs Are Safe. Here’s Why.

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The owner of Diamond Dental Lab in Des Plaines, Ill., furloughed his staff of nine in late March after the state ordered dental practices to close for all but emergency visits and his customers stopped putting in orders for the crowns, bridges, and implants that his small business has made for the past 20 years.

Illinois lifted the coronavirus restrictions on dentists in early May, but Mike Bridge says most of his dentist clients are still closed as they try to get new safety protocols and personal protective equipment in line. His revenue was down 95% in April, and it isn't any better this month.

"We survived 9/11, [the financial crisis in] 2008, and hopefully we'll survive this, but this is the hardest one," Bridge says. "Business never entirely dried up before." His application for a loan under the federal Paycheck Protection Program, or PPP, was approved on May 18, but there's still not enough business to bring back employees.

Versions of what's happening at Bridge's business have been playing out across the country for the past two months, as lockdown measures have disrupted individual businesses and entire industries. While the virus is affecting companies large and small, it's small businesses-often with smaller cash cushions and less access to credit-that are under greater assault.

Small businesses are responsible for about half of U.S. employment, half of gross domestic product, and 40% of total business revenue. In short, they're key to the recovery, and yet investors seem to have largely discounted the threat their struggles pose for the broader economy. While the small-cap Russell 2000 -an imperfect proxy for the independent businesses that make up the small-business sector-is down 20% this year, the S&P 500 index of larger stocks is down just 8% after rallying on hopes that the economic impact of the pandemic might be contained and the recovery relatively quick.

Yet the length and depth of the recession upon us will in large part depend on how small companies and the workers they employ fare during the shutdowns-and how well government aid programs help small firms stay afloat. So far, the hole is deep: Small businesses-those with fewer than 500 employees-and franchises together account for nearly two-thirds of the more than 20 million jobs lost since March, according to data from payroll provider ADP. The average monthly income loss for hourly employees stood at about $1,300 at the end of April, translating to over $60 billion in income lost across the U.S. economy each month, according to Deutsche Bank. Economists there predict an 8% decline in GDP this year.

The coronavirus and efforts to contain it represent a shock to America's small-business sector that has little parallel, says Alexander Bartik, an economics professor at the University of Illinois who led a team of economists that surveyed 5,800 small firms to study the virus' impact. As of early April, 43% of businesses were temporarily closed, businesses had on average reduced payrolls by 40% relative to January, and 38% said they were unlikely or only somewhat likely to survive the crisis and reopen this year.

Though grim, the findings make sense when you consider the financial fragility of the sector. Bartik says the median small business has more than $10,000 in monthly expenses and less than one month of cash on hand. In a "normal" recession, that might be sufficient to cover several months of revenue declines. "Now, you have certain industries where revenue is 50% or more below what it was." he says. "Even during a bad recession, it's really rare to have the kinds of declines we're seeing."

That's especially true for industries most directly affected by shutdowns and where social distancing is harder. Restaurant reservation-booker OpenTable's CEO Steve Hafner predicts that 1 in 4 restaurants will go out of business due to the coronavirus. Plenty already have. Mounting retail bankruptcies highlight how difficult it has been for even large players, like J.Crew, J.C. Penney, and Neiman Marcus, to navigate the crisis.

It would be worse, if not for substantial interventions by the Federal Reserve and the U.S. government that have helped limit the damage. Sweetened jobless benefits include an extra $600 per week for up to four months and let normally ineligible self-employed and contract workers claim them. For some workers, that amounts to more money than they had been making before being laid off. But that effect shouldn't be overestimated. Even though many people who have lost their jobs are getting unemployment benefits with high income-replacement ratios, these payments have replaced only about half of lost income, according to the Brookings Institution.

As April retail sales data showed, consumers aren't spending, and it's not just because they've had fewer places to go; even grocery-store sales dropped from March. If more temporary layoffs become permanent because some businesses don't reopen, or because demand isn't there when they do, then the bottom line is that the labor market and consumer spending will come back slowly, says Torsten Sløk, chief economist at Deutsche Bank Securities.

To that point, some essential businesses that never had to close have seen sales slump. In St. Paul, Minn., Ben Footh has been conducting fire sales across his two used-car dealerships. He's selling about 30 cars a month lately, compared with 80 previously, at about 70% of the normal price to get the deals done. He says his lenders predict a 50% default rate in his industry, and his strategy is to stay alive in order to seize the opportunity to buy failed rivals' autos at auction if he has the chance.

"I'm trying to get through this and run lean and mean," he says, in begrudging acceptance that he is losing money on the cars he's selling because that's the only way he can sell anything. While he has been allowed to stay open, he also says that he's being hurt by social-distancing guidelines that have resulted in appointment-only service with one customer at a time.

The Paycheck Protection Program, meant to provide small businesses with forgivable federal loans to keep workers on their payroll, is potentially the most promising effort by Washington to support the broader U.S. economy. When Congress and the Trump administration in late March passed the first round of PPP loans as part of the broader Cares Act, the $349 billion went quickly. Many not-so-small, publicly traded businesses secured loans, thanks to their banking relationships, while lots of truly small businesses struggled to jump administrative hurdles or get their banks' attention. (Some of the public companies that got PPP loans have since returned the aid.) The second round of PPP loans, taking the total up to $660 billion, has reached more businesses and given some economists reason to turn slightly less pessimistic about the economic outlook.

Sløk estimates that the PPP is currently supporting more than 50 million jobs. He says the program could help the economy rebound more quickly if enough businesses hire back employees. The key, however, is whether those companies see customer demand improve and manage to keep workers, as the coronavirus threat remains and the toll ripples through the economy.

There are signs that the program is having a positive impact. When Barron's first talked to Sara Turack, a salon owner in Omaha, Neb., in early April, she had laid off her staff of seven and was worried that customers wouldn't be in a hurry to come back once stay-home orders were lifted, given how close stylists and customers are situated. A few weeks later, she had her PPP loan request fulfilled.

Now, Turack's salon is back open for business. She used her loan to hire back her staff members and hired three more, and says that revenue is approaching previrus levels. Some customers are hesitant to return, but so far, 89% of her clients have booked appointments. On May 14, Turack had a bride-to-be in the salon ahead of her wedding, a sign that a degree of normalcy is returning to some parts of the country. Turack says that some of her nearby competitors have closed for good, and others have decided to remain shut until certain provisions, like allowing a maximum of 10 customers at a time and requiring masks, are lifted. That's helping her business. "Some clients are better than no clients," she says.

Sløk says that what has surprised him the most in the past few weeks are signs of life in industries he hadn't expected to recover quickly. There are salon owners like Turack seeing customers eager to come back, and restaurants in some areas of the U.S. are seating unfazed diners. In Tampa, Fla., and Scottsdale, Ariz., for example, restaurant seating is already at about 40% of previrus levels, even with capacity restrictions, OpenTable shows.

In a handful of states-Nebraska, Mississippi, and the Dakotas-90% or more of small businesses have received PPP loans, according to Deutsche Bank, using data from the Small Business Administration. States including Idaho, Oklahoma, and Louisiana have had at least 80% of small businesses receive loans.

Yet these approval rates aren't being seen everywhere. In New York, where there are more than two million small businesses employing four million people and where the virus hit hardest, less than 60% of small firms have gotten PPP loans. New York City alone is responsible for a tenth of the country's GDP.

Nationwide, nearly half of small businesses polled by the National Federation of Independent Business say they're worried about getting their customers back, while 59% of respondents say they don't think their local economy will return to precrisis levels until 2021 or later. And in some places where the economy has reopened, consumers appear more hesitant to venture back out. In Nashville, restaurants are seating only about a tenth of previous traffic, while in Dallas, it's about a fifth. The point: Reopening is one thing, but getting customers to show up and spend is another.

Take Keith Cohen, the owner of New York City bread supplier Orwasher's Bakery. He received PPP funds, which he says have helped, but ultimately the sharp cutback in commercial activity may be too much to survive. "It's not going well," Cohen says, as at least 60% of his wholesale customers are closed. Even those still open are doing a fraction of their previrus business, leaving Cohen's wholesale business down 70% and unpaid receivables mounting.

While the PPP is helping many businesses hang on, it has left many behind. Bartik, the University of Illinois professor, notes that many small businesses aren't eligible because they don't spend enough on payroll expenses and instead spend on things like equipment. The program requires at least 75% of the funds be spent on payrolls, making it more of a roundabout way of channeling money to workers through banks than a direct small-business support program.

That has left Nicole Adkins Rice, the owner of a live-events company in Swanton, Ohio, feeling like she has slipped through the cracks. She and her business partner don't have employees and instead use about a dozen contractors for corporate events the company orchestrates. Business went dry in early March, when companies began canceling gatherings, and Rice is losing hope that her business will make it through. She says the reason she has hung on this long is because the Internal Revenue Service pushed back the tax-filing deadline.

"We have a game plan that has to work perfectly," Rice says. If business doesn't recover enough to pay the tax bill in July, she'll owe the IRS money that's not there. "Initially, we had faith this would be OK. But as time goes by, we don't know how long we have to stretch our dollars," she says. "We don't usually have a lot of money in the bank that we're running on."

Others have been denied funds or received only a portion of the amount for which they qualified. In Wisconsin, Ashley Lang's four shops were deemed nonessential. At first, she stayed open, letting in one customer at a time. Then the local police came to shut her down and she laid off her 10 employees. Lang didn't get PPP funding because her stores sell CBD products, derived from cannabis, which makes her ineligible, even though larger retailers selling similar products remain open.

"It irks me to the core," Lang says. "The towns here, [parking] lots are full at big-box stores, and you drive by small businesses and they're empty." For the past couple months, she has made about 20% of normal revenue through deliveries.

It's impossible to know at this point how many small businesses have already failed, Sløk says, just as it's impossible to know how many layoffs are temporary, as many businesses' fates are unclear to the owners themselves.

What is clear, however, is that the speed and robustness of a U.S. recovery is tethered to the ability of small businesses to weather the crisis. We will see in the coming weeks as the country reopens how comfortable consumers are in getting back to normal, in turn determining how quickly business stabilizes and the labor market bounces back. We will also see in the weeks ahead whether reopenings cause coronavirus cases and deaths to again spike, and the degree to which that affects consumer behavior.

For investors, there's room for cautious optimism, or, it may be more accurate to say, there's room for a bit less pessimism. "Forget valuations," Sløk says. Instead, he says investors should think about the fundamental outlook for the U.S. consumer-which is going to both determine and be determined by the ability of small businesses to survive and again thrive.

Write to Lisa Beilfuss at lisa.beilfuss@barrons.com

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America's Small Businesses Are Sputtering. Here's Why That Matters for the Economy-and Investors.

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The owner of Diamond Dental Lab in Des Plaines, Ill., furloughed his staff of nine in late March after the state ordered dental practices to close for all but emergency visits and his customers stopped putting in orders for the crowns, bridges, and implants that his small business has made for the past 20 years.

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What To Consider In Determining Owner’s Compensation

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What To Consider In Determining Owner’s Compensation

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Whether a company is being valued for a shareholder or an equitable distribution dispute, one of the most common normalization adjustments to a subject company's income stream is owner compensation. Both the Court and the IRS tend to closely scrutinize this issue, with the IRS in frequent disagreement as to the reasonableness of shareholder-employee compensation.

For income tax purposes, business owners typically prefer to classify payments as tax-deductible wages. This allocation reduces both their corporate taxes and their federal taxable income. As one might imagine, the IRS is correspondingly meticulous in its examination of these classifications. If it believes that owner compensation is excessive, it may claim that non-deductible dividends have been disguised as compensation.

As they pertain to business valuation, the determination and application of reasonable shareholder-employee compensation are similarly contentious. The correlative relationship between owner compensation and cash flow means that when compensation is inflated, the available cash flow is reduced. Correspondingly, the indicated value under the income approach will be likewise reduced.

But whether challenges to owner compensation emanate from taxing authorities or a rival valuation expert, the case law in this area strongly indicates that there is no global rule of thumb - reasonable officer compensation is determined according to the particular circumstances of an individual case.

It is for this reason that Trial and Appellate Courts often struggle to resolve questions regarding reasonable officer compensation. For non-valuation professionals, this confusion is perhaps attributable to the number and diversity of sources used to ascertain reasonableness. In the course of their analyses, business valuation experts may consider replacement costs, peer group comparisons, compensation studies, and employment ads. Ultimately, one or more of these sources may be deemed an appropriate proxy.

But whilst we may be certain that determinations of reasonable officer compensation are typified solely by their individualism, it is nevertheless pertinent to inquire whether there are any broadly relevant sources that both jurists and valuation professionals should consider when approaching this issue.

When ascertaining reasonableness, we recommend considerations of the following:

The Owner's Role in the Company - This includes a consideration of the owners' expertise, management skills, relationships, reputations, and personal guarantees of corporate indebtedness.

Compensation Paid by Comparable Companies for Similar Services - This includes a consideration of benchmark companies and their relevant characteristics.
The Company's Character and Condition - This includes a consideration of revenues, profits, and asset growth in the periods leading to the valuation date. It likewise encompasses the identification and analysis of the shareholder and employees' contributions to the company's daily operations.

Internal Consistency of Compensation Arrangements - This encompasses inquires as to whether salaries and bonuses are paid according to a structured or formal basis, and whether this methodology is applied uniformly to all areas of the company. It likewise includes a determination as to whether disguised compensation in the form of discretionary expenses is present.

Independent Investor Test - This includes examinations as to both the reasonableness of shareholder-employee compensation and potential conflicts of interest from a hypothetical independent investor's perspective. In so doing, one should consider whether an investor would be satisfied by their return on equity after the deduction of shareholder-employee compensation.

Venue-Specific Factors - This includes considerations of the subject's venue, as well as the facts and circumstances surrounding its members' compensation. Each jurisdiction may have its own intricacies. Therefore, one should consider how venue-specific factors may impact the total analysis.

Several other factors should be considered in determining shareholder-employee compensation, particularly when multi-generation family members run the business. The items discussed in this blog post are just a few highlighted by the Trial and Appellate Courts. In addition, the Internal Revenue Service has published a Fact Sheet specifically for S-Corporations.

If you have questions about this or any other valuation issues feel free to contact me at the above phone numbers. I can also be reached via email at msgcpa@msgcpa.com

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What To Consider In Determining Owner's Compensation - Mark S. Gottlieb

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Whether a company is being valued for a shareholder or an equitable distribution dispute, one of the most common normalization adjustments to a subject company's income stream is owner compensation. Both the Court and the IRS tend to closely scrutinize this issue, with the IRS in frequent disagreement as to the reasonableness of shareholder-employee compensation.

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Home Office Deduction Considerations During COVID-19

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Home Office Deduction Considerations During COVID-19

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Thirty years ago, when I was a real accountant (haha), January was one of the most hectic months of the year. The preparation of annual payroll tax returns marks the quiet beginning of tax season. You should now start to receive W-2's, 1099's, and other tax forms to be set aside for the preparation of your 2020 individual income tax return. Many of our regular readers are now working from home on either an intermittent or permanent basis. For those of you in this category, you may be able to take advantage of the employee home office deduction.

In the past, the standards for deducting home office use have proven notoriously prohibitive. Pursuant to the 2018 Tax Cuts and Jobs Act, requirements for W-2 wage earners clearly stipulate that for its costs to qualify, a given home office must:

Be used at the convenience of the employer

Constitute a specifically allocated area used expressly for work-related purposes and

Have space for storing work-related materials.

There are of course numerous other requirements, but historically these have proven sufficient barriers for many remote employees. But since the advent of COVID-19, two novel legislative pathways have opened up:

1. Section 139 (Disaster Relief Payments) and

2. Section 165 (Losses)

The primary purpose of this blog post is to briefly discuss both of these two sections of the Internal Revenue Code.
Section 139 (Disaster Relief Payments)
Section 139 provides that any funds an individual may receive as Qualified Disaster Relief Payments cannot be included in their annual Gross Income. By this rule, when a business owner reimburses an employee for the costs of their home office, those reimbursement funds need not be included in his or her income. Employers are thus correspondingly exempt from reporting any such payments on either Form W-2 or Form 1099. In fact, they themselves may deduct these amounts as Section 162 Ordinary and Necessary Business Expenses. Crucially, Section 139 further provides that to qualify as such, Disaster Relief Payments need not emanate strictly from governmental sources. According to the IRS, qualifying funds include "any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster."Section 139's clarity and scope have made it the broadly preferred pathway to reimbursing employees for their home office expenses. But if its parameters do not fully encompass their particular circumstances, employees have an alternative option: Section 165 (Losses).
Section 165 (Losses)
Under Section 165, "any loss occurring in a disaster area and attributable to a federally declared disaster may...be taken into account for the taxable year immediately preceding the taxable year in which the disaster occurred." As the COVID-19 outbreak was declared a National Emergency on March 3, 2020, the terms of this provision firmly qualify it as a federally declared disaster. Any employees who might have been forced to shoulder the costs of a home office could therefore report those costs on Form 4684 (Casualties and Thefts). It is notable however that any deduction thus awarded would be reduced by the $500 Qualified Disaster Loss Subtraction. Wage-earners should likewise consider that the deductible loss would be carried forward to Schedule A (Itemized Deductions), where it would be added either to the standard deduction, or any other itemized deductions they may have.

No doubt many remote employees will be eager to take advantage of these opportunities. But to avoid any future complications, it is necessary to carefully review Form 8829 (Expenses for Business Use of Your Home)'s calculation instructions. When completing this form, wage earners should consider the cost of computers, office equipment, furniture, and other work support materials. Certainly, COVID-19 has posed significant complications to many employees' potential tax outlooks. It is possible that some will require professional guidance to navigate the newly relevant paperwork.

To find out more how COVID-19 may affect your 2020 income tax return please consult your tax advisor. You may also find other blog posts from our firm to be of assistance.

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Home Office Deduction Considerations During COVID-19 - Mark S. Gottlieb

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Thirty years ago, when I was a real accountant (haha), January was one of the most hectic months of the year. The preparation of annual payroll tax returns marks the quiet beginning of tax season. You should now start to receive W-2's, 1099's, and other tax forms to be set aside for the preparation of your 2020 individual income tax return.

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Business valuation is the process of determining the overall value of a particular business or company. Determining the exact business value can often be complicated, even for small businesses and partnerships.

However, an accurate approximation of a business's total worth can be determined from:

The business owner's own accounting records

Input from a professional, such as an expert analyst, lawyer, or appraiser

Economic indicators, including assets owned by the company, cash flow, and earnings of the company

The business laws in each state may have different rules when it comes to determining a business valuation. The exact calculations and valuation methods may also depend on other factors, such as the type of business involved and the purpose of the valuation.

What is the Purpose of a Business Valuation?

The first step in a business valuation is identifying the purpose for which you need it. You may need a business valuation for an acquisition or sale, litigation, taxation, insolvency, or business disputes. The purpose of a business valuation depends on the particular circumstance.

The valuation conclusion under one standard of value may be significantly different than one reached on another standard of value. Be aware of this when you compare the conclusions of valuations or when reviewing valuation reports prepared for purposes other than your current issue.

What are the Types of Business Valuations?

There are generally three business valuation approaches:

Asset approach

Market approach

Income approach

The asset approach is based on the economic principle that a business is a combination of assets and liabilities which can be used to paint a picture of a business's value.

The market approach of a business's value uses signs from the real market to determine how much a business is worth by comparing similar businesses to create a reasonable sale price.

The income approach looks at the business's future earning expectations to determine the value of the company.

Additionally, financial considerations used to determine a business's value include non-financial considerations, such as the business's location or brand name. A business's location and brand name are often considered and included in the valuation of a company in order to achieve the most accurate value.

What is Standard of Value?

The standard of value describes the type of values being measured. The following values are relevant standards in business valuations:

Fair market value: Fair market value is the price at which property could change hands between a buyer and a seller.

Fair value: Fair value is the price that would be received when selling an asset or the price paid to transfer a liability in a transaction. In a legal context, the fair value applies to certain specific circumstances which change from state to state.

Investment value: Investment value is the specific value of an investment to an investor based on certain requirements. Investment value reflects the circumstances particular to a buyer or seller. Investment value may differ from fair market value, as some buyers may realize greater economic benefits from one asset than other buyers.

Intrinsic value: Intrinsic value is the amount that an investor considers to be the real worth of an item based on an evaluation of available facts. Intrinsic value is a judgment of value based on perceived characteristics of the investment.

Depending on the type of case and jurisdiction, standards of value may be defined by statute. However, case law may provide more guidance about standards of value that should be used in particular situations. Oftentimes, case law outlines certain exceptions and modifications to standards of value.

What are Levels of Value?

Levels of value consider the ownership characteristics of a business. Degrees of control and marketability are considered. Levels of value are:

Controlling interests: The control level of value for a business represents what the company would be priced at if the company and all of its interests were sold. A controlling owner has the ability to sell the company and make decisions about business affairs.

Minority interest: Ownership of less than a majority number of voting units is considered a minority interest. Minority owners cannot control company policy or make decisions on behalf of the company. Minority interests limit an owner's ability to control the affairs of a business.

When Is Business Valuation Necessary?

Business valuation becomes necessary in many different situations, especially where the overall worth of the business is in question. Some examples of instances where business valuation may be needed include:

Also, a business owner may wish to conduct a business valuation from time to time in connection with performance evaluations or similar reviews. A periodic business valuation can help determine whether it is profitable to continue the business operations and help identify possible areas of improvement for the company.

How Does the New Tax Law Affect Depreciation?

The Tax Cuts and Jobs Act introduced additional benefits for the accelerated depreciation of used assets. The old law, which applies to assets acquired on or before September 27, 2017, provides a 50% first-year deduction, but only for new assets. The new tax law provides a 100% first-year deduction that can be used on both new and used assets. Depreciation starts to phase down by 20% per year in 2023.

These changes change the way that a company's finances look in year-to-year comparisons. Additional tax benefits may affect how a company invests its capital assets. When predicting future cash flows, it is necessary for businesses to consider these differences in the company's past and future capital expenditures. Large depreciations can make it seem like a company has lost more money than it did in past years.

What If I Have a Dispute Over a Business Valuation?

While business valuations may be necessary for the company, they can also be a source of legal disputes in many cases. For example, a business valuation may involve disputes with other parties, such as:

Beneficiaries who may be receiving some or all of the business assets

Insurance companies

Creditors and other types of financial lenders

Business valuation methods can involve disputes over:

The actual value of the business

Tax matters

Business shares, especially in the distribution process during business wind-up of a joint-venture

In order to protect the company and its members from economic losses, it is generally best to include some provisions regarding business valuations within the company bylaws or operating rules. Also, whenever a contract is made in connection with the business, the parties may wish to include a clause addressing business valuation matters. This can help to avoid disputes and provide written records in the event that a lawsuit arises.

Do I Need a Lawyer to Assist Me With Business Valuation Issues?

Business valuation laws can be complex and will also vary from region to region. If you need assistance with business valuation issues, you may wish to hire a business lawyer for advice. Your attorney can help you determine how best to conduct a business valuation so that you obtain accurate results. In the event of any legal disputes or lawsuits, your lawyer can help represent the company in order to protect the company's assets and properties.

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A business valuation may be necessary in certain situations including the buying or selling of a business. Get full information here.

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Legal Consequences of Inflated Valuations

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Legal Consequences of Inflated Valuations

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Yesterday, New York Supreme Court judge Arthur Engoron ruled in the ongoing lawsuit alleging former President Donald Trump and his businesses provided false financial statements to obtain loans and other benefits. This case piqued my interest as a credentialed business valuation expert, forensic accountant, and expert witness. Yesterday's decision was over thirty pages long, and I wanted to break down the extent of the document for those following these ongoing legal battles.

The New York Attorney General's office had brought claims against President Trump, his family members, and corporate entities under a statute prohibiting persistent fraudulent conduct in business. The AG submitted evidence that President Trump inflated the valuations of his assets on financial statements from 2011 to 2021.

For instance, President Trump claimed his apartment in Trump Tower was 30,000 square feet, later learned to be about three times its actual size. This overstatement led to an overvaluation of over $100 million! The Court also found evidence that other Trump assets, such as branding premiums, shared the same misstatement.

President Trump's legal team asked the Court to dismiss the entire case, arguing the financial statements contained disclaimers and that determining value is subjective. Those requests were later denied.

The Court ruled yesterday that the Attorney General provided sufficient evidence that President Trump knowingly submitted false financial statements over multiple years. The judge ordered the dissolution of several corporate entities owned by the Trumps and the appointment of an independent monitor for the Trump Organization.

While further potential penalties will be determined at an upcoming trial, the Court also sanctioned five of Trump's attorneys $7,500 each for engaging in frivolous motion practice to dismiss the claims.

The outcome highlights the importance of substantial evidence and objective standards in fraud cases involving financial disclosures, including valuation issues. The next steps will establish additional consequences, with the next court date being Monday, October 2nd.

Since the issues at bar seem in line with our firm's work, we will pay close attention to its developments. In the interim, I am curious to see if any new issues come to the Court's attention from the newly appointed monitor.

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Legal Consequences of Inflated Valuations: Trump Case and Beyond

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Yesterday, New York Supreme Court judge Arthur Engoron ruled in the ongoing lawsuit alleging former President Donald Trump and his businesses provided false financial statements to obtain loans and other benefits. This case piqued my interest as a credentialed business valuation expert, forensic accountant, and expert witness.