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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, Fourth Quarter, 2008 Court Considers Built-in Capital Gains Deduction In Applying Fair Value Murphy v. U.S. Dredging Corp., 2008 NY Slip Op 31535 May 19, 2008 The Eleventh Circuit Court of Appeals' recent reversal of the U.S. Tax Court in Jelke v. Commissioner established a 100% discount for built-in capital gains when appraising holding company assets at fair market value, at least in the estate and gift tax arena (and following Fifth Circuit precedent). But what of shareholder oppression and dissent cases: These typically apply a statutory fair value standard, on a going-concern basis—as compared to Jelke's assumption of a hypothetical liquidation on the valuation date. When conducting a statutory fair value appraisal, is it appropriate to deduct the full, current value of imbedded capital gains? The New York Supreme Court (its trial-level court) recently addressed the issue in Murphy. The defendant was a closely held company that owned valuable waterfront properties in New York City and New Jersey. In 2001 and 2005, the company sold two tracts to major retailing chains for multi-millions, investing the proceeds in similar commercial properties. The transactions qualified as tax-exempt, 1031 like-kind exchanges, permitting the defendant to defer $11.6 million in capital gains. In 2006, a 37% shareholder faction sued for oppression, based primarily on the majority owners' paying themselves excessive salary and pensions. After the parties couldn't agree on a buyout price, they sought a statutory fair value determination of the shares as of 2006. Same approaches, widely different values Both parties retained experts who used the net asset approach and the discounted future cash flow (DCF) method to value the shares. But that's where their similarities ended. In his net asset approach, the defendant's expert deducted 100% of the $11.6 million deferred capital gains tax and applied a 15% discount for lack of marketability (DLOM) to reach a value for the company of $12.8 million. By contrast, the shareholders' expert assumed a nineteen-year holding period, after which the interest would liquidate, resulting in capital gains tax (at present value) of $3.4 million. Applying no DLOM, he valued the company at $24.8 million. The two experts' DCF values were even further apart, due primarily to their different opinions on working capital. As of January 2006, the company's balance sheet showed $16.2 million in current assets, without itemizing any as excess working capital (nonoperating assets). The shareholders' expert determined that nonoperating assets comprised $14.1 million in his DCF model, plus $6 million of future cash flows, for $20.1 million of total equity. But the company's expert claimed that all current assets were working capital, and he valued the equity at $11.4 million. Overall, the shareholders' expert reached an enterprise fair value of $16 million under the DCF method, compared to nearly half that amount by the company's expert, or $8.7 million. The shareholders' expert weighted his net asset and DCF values at 45% and 55%, respectively, due to the company's long-term real estate holdings, and long-term projected cash flows. The defendant's expert weighted the two approaches equally; however, he testified that he would assign an 85% weight to his DCF value if the court didn't accept a 100% deduction of imbedded capital gains in his net asset model. Based on the disparate expert models and weightings, the shareholders claimed that their 37% interest was worth $8.14 million, while the company said it was worth only $3.76 million. Tax applications not identical The trial court began by observing that state law generally recommended the net asset approach for determining fair value of real estate holding companies and supported the application of DLOM but not minority discounts. As to the capital gains discount, the court noted that a fair value calculation was "not identical" to a Tax Court calculation. The evidence clearly showed that the company was not contemplating liquidation, "and thus a liquidation or 'semi-liquidation' scenario" was not appropriate. The court agreed with the shareholders' expert that a nineteen-year holding period was reasonable, based in part on the company's prior, long-term holdings (between twenty and thirty-six years for the two sold properties), and similar terms for its §1031 investments. Further, the court found that the potential for converting to an S corporation also gave the majority "tremendous incentive" to hold investments for at least ten years, to avoid capital gains; and a willing buyer would most likely not expect to deduct the entire amount of imbedded tax. "Why would such [a] buyer buy
Thus, while the court refrained from taking a full 100% deduction for current capital gains, it deducted the $3.4 million present value of future tax liability and also applied a 15% DLOM. Its net asset value for the company came to approximately $18 million, or $6.7 million for the shareholders' interest. In its DCF approach, the court calculated the company's working capital at $6.45 million, rejecting the experts' assumptions. Accordingly, it directed both parties to rework their DCF calculations and promised a final decision that would give "appropriate weight" to the different methods. |
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