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Do you know what your business is worth? Our business valuation experts provide you with an objective, expert view of your company – while helping you understand the value drivers of your business. In addition to preparation for sale, knowing the actual value of your business is crucial for a number of reasons:
Your business' balance sheets and financial statements are not enough to present the true value of your company. An accurate valuation requires a customized approach. Our Certified Valuation Analysts integrate basic valuation principles with the very latest developments in business valuation theory to arrive at the most comprehensive valuation possible. We can also help you comply with the complex requirements of the Statements of Financial Accounting Standards (SFAS) Nos. 141 and 142. These standards require companies to perform a valuation to determine the current fair value of intangible assets and goodwill acquired in a business combination or merger and to periodically test previously recorded goodwill and intangibles with indefinite lives for impairment. 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, Third Quarter, 2008 IRS Expert Attacks Key Assumptions in Inflated Appraisal KSP Investments, Inc. v. U.S., 2008 WL 182260 (U.S. Dist.) January 17, 2008 In December 1999, the plaintiff retained a "Big 4" accounting firm to determine the fair market value of an overseas waste-to-energy facility subject to a sale and leaseback arrangement. Several years later, the IRS adjusted the plaintiff's 1999-2003 tax returns, claiming that the plaintiff used the 1999 appraisal to inflate the purchase price of the facility to obtain greater depreciation and interest deductions for the transaction. The IRS offered an expert—an investment banker, not an accredited business appraiser—to criticize the 1999 valuation. The plaintiff challenged his testimony under Daubert, arguing among other grounds that the government's expert didn't offer his own value conclusion but simply substituted different data into the 1999 appraisal. Same methodology, different results Although the 1999 appraisal used the "well established and accepted" three-part valuation analysis consisting of the market, income, and cost approaches, the IRS found serious flaws in their application. 1. Market approach. Given the dearth of similar waste facility sales, the 1999 appraisal rejected a comparable transaction methodology in its market approach. Instead, it evaluated comparable companies, selecting several publicly traded waste management firms, resulting in value of $557 million. The IRS expert said this methodology was "misapplied." Specifically, he criticized the appraisal's failure to adjust earnings of the comparables to reflect one-time events, such as a 1999 merger, which resulted in an overstated market multiple. After making all adjustments, the government's expert valued the waste facility at $133 million under the market approach—considerably less than the $557 million value claimed by the plaintiff's expert. 2. Income approach. Based on the discounted cash flow model, the 1999 appraisal valued the facility at $460 million. But it projected unreasonably high 1999 revenue by inflating waste "tipping fees" that were 70% above their historical levels, the IRS expert said, "all without explanation." This critical assumption—that waste management fees would increase substantially—was "inconsistent with reasonable economic expectations." Using actual and historic figures, the IRS expert found a DCF value for the facility of approximately $196 million. 3. Cost approach. The 1999 appraisal valued the waste facility at $423 million under a cost valuation analysis. But this double-counted capitalized interest and a turnkey premium, the IRS experts aid. After withdrawing these costs, he reached a value of $254 million. Must an expert state an FMV opinion? Interestingly, the plaintiff claimed that the IRS expert's opinion was "irrelevant" because it did not render any conclusion related to the core dispute—i.e., the fair market value of the subject waste facility. But the federal district court (N.D. Ohio) dispensed with this argument. In general, the IRS claimed that the plaintiff inflated the purchase price of the waste facility to obtain greater interest and depreciation deductions by using the "insupportable 1999 appraisal. Testimony by the IRS expert directly attacked the 1999 appraisal and "if believed," the court said, would raise "significant doubts about [the] appraised value of the Facility" and "the participants' true motive for entering into the sale and leaseback transaction." The expert evidence was thus "highly relevant." As to its reliability, by using the same generally accepted methodology as the plaintiff's 1999 appraisers, the IRS expert had merely pointed out problematic assumptions and data. The plaintiff could rebut the expert's assumptions through crossexamination. Is lack of BV certification fatal? Finally, the plaintiff claimed that the IRS expert lacked reliability because he wasn't a licensed appraiser, and he had little specific experience in valuing the specialized area of waste-to-energy facilities. However, the expert had been a corporate banker for more than twenty-five years, the court observed, and had "significant experience" in both domestic and international energy project transactions, including analyzing related valuations. "Although a certified appraiser might be able to provide a more authoritative expert opinion in this case," failure to obtain formal certification or specialized expertise were not grounds for witness exclusion, the court held, and qualified the IRS expert. |
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