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Contents
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Valuation in the Current Environment The current economic environment has challenged the valuation community in determining the value of most businesses. Valuators not only have to deal with the subjectivity of valuation overall, but are now struggling to support some of the most basic valuation issues such as cost of capital and marketability discounts in quickly changing economic times. The need for increased self-review, research and support for valuation methods utilized has never been greater. Methods to develop the costs of capital and marketability discounts should look familiar but also include an element to account for the current economic environment. Additional thought and support should be given to the following areas:
These are just some of the factors that should be noted when reviewing valuations in the later part of 2008 and early 2009. Our valuation experts are available to discuss these issues with you and are capable to address the current economic conditions in a supportable manner. For more information about our Business Valuation practice, email BVLS@SCandH.com or call (410) 403-1500 | (800) 832-3008.
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Valuations Insights, Second Quarter, 2009 Court and BV Expert Cope With Lack of Financial Data in Difficult Divorce Ebner v. Ebner, 2008 WL 4572516 (Ohio App.) October 6, 2008 It happens all too often in high-conflict divorce cases: the owner/spouse is reluctant or simply refuses to provide the financial disclosures and documents necessary for the non-owning spouse to value the marital business. In this case, the husband not only failed to turn over the required documents—he also failed to file corporate tax returns for his business for six years prior to the divorce. The expert did the best he could. As of the day of trial, the expert still had a list of documents that he had requested but never received from the husband in connection with his sole-proprietorship of a heating and air conditioning business. In addition to lacking the relevant tax returns, the expert found "vast discrepancies" in the corporate ledger. Nevertheless, he was able to estimate a fair market value for the business at $75,000. The court asked how, despite the missing documentation, he was able to make that determination. The expert replied that he had looked at local and national economic conditions in addition to industry reports. From this market research, he was able to ascertain that the median value of businesses selling in same industry was approximately 30% of revenues. From what documents he did receive, the expert also concluded that the subject company had $35,000 in cash receivables and inventory, and equipment originally worth $130,000.; He was not able to get the equipment appraised (most likely due to lack of cooperation and funds), but the expert said it was "reasonable to assume" that the equipment held an additional $40,000 in residual value.He also considered the potential goodwill of the company, which had been in business for over 60 years, plus the owner's purchase of a 50% minority interest from his brother for $15,000. Thus, despite the "difficulty in using standard valuation methodology without the benefit of reliable financial data," the expert believed that his reported value of $75,000 for the company was "accurate." The husband chose not to provide any expert testimony on valuation. He did testify to a "litany of outstanding company debts," however, and of his own refusal to take a salary to maintain payroll. Nevertheless, he also admitted that he paid personal expenses through the company. Overall, the trial court acknowledged the challenge of assessing the company’s value in this case, but found that the wife's expert had presented the only credible valuation, and adopted his $75,000 figure. On review, the appellate court agreed, essentially confirming that the trial court—and the expert—had done the best they could under tough circumstances. |
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