| Spring 2007 |
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INFOLETTER
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Partner's Perspective |
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What's It Worth? It Depends...
By Mark B. Bober, Certified Valuation
Analyst/Accredited in Business Valuation*, CPA, Partner
Value is a tricky concept. After all, one man's trash is another man's
treasure, and beauty is in the eye of the beholder, right?
Similarly, a business or property is worth differing amounts depending on
who's buying it. In other words, what is the business or property worth to whom?
Valuation can't be done in a vacuum. It is crucial for a business valuation
expert to know the purpose behind a business valuation. Is the business value
being assessed for sale? For estate planning? For divorce proceedings? The
conclusions drawn in a valuation report may vary based on the intended user.
Some standards are legally mandated, while others simply make sense. Here's a
look at the most common standards of value.
Fair Market Value
The most commonly used standard, fair market value, is used in virtually all
state and federal tax matters, including gift and estate taxes. It is defined by
Revenue Ruling 59-60 as "the amount at which the property would change hands
between a willing buyer and a willing seller, when the former is not under any
compulsion to buy, and the latter is not under any compulsion to sell..."
 Investment
Value
Unlike fair market value, this standard assumes that certain synergies exist
between buyer and seller. It's typically defined as the value of a business or
property to a specific buyer. For example, an investor may have specific
requirements for an acquisition. If the business being appraised meets all of
those criteria, its value is obviously enhanced. Investment value is often used
in mergers and acquisitions.
Note that fair market value is often lower than investment
value because investment value is calculated with a specific
buyer in mind.
Intrinsic or Fundamental Value
Frequently used in the analysis of stocks, this term refers to what a
financial analyst believes is the "real" or "true" value of a security. It is
based on the perceived characteristics of the investment according to a security
analyst's fundamental analysis of the company's assets, earning power and other
factors. (If the market value is below the intrinsic value, the analyst will
consider the stock a "buy.") Intrinsic value becomes fair market value when
investors reach the same conclusions.
Fair Value
This standard is used in cases of dissenting stockholders' disputes. Many
states define fair value with respect to dissenters' shares as "the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects." This standard of value typically dictates that no valuation
discounts are applicable.
Obviously, the valuation amount may differ depending on which standard is used.
At the beginning of every valuation engagement, the business valuation
professional will work closely with the client to discern which standard is
appropriate.
Do you have questions about valuation standards? Please call or email me at
markb@bobermarkey.com
and I'll be glad to discuss them with you.
BMF&C
* Note: The ABV credential is awarded through the American Institute of
CPAs (AICPA); the CVA credential is obtained through the National Association of
Certified Valuation Analysts.
Common Standards
| Valuation
Purpose |
Applicable
Standard |
| Taxes/contributions |
Fair market value |
| Purchase or sale |
Usually fair market value, sometimes
investment value |
| Divorce |
Depends on state and case law |
| Buy/sell agreements |
Depends on what parties prefer |
| Dissenting stockholders/minority
oppression |
Generally fair value |
| ESOPs |
Fair market value |
| Going private |
Fair value in most states |
| Antitrust cases |
Varies |
| Other damage cases |
Mostly governed by state statutes |
Adapted from Valuing A Business, 4th edition, by Pratt, Reilly and
Schweihs.
Disclaimers Facilitate
Post-Mortem Estate Planning
By Paula S. DiVencenzo, CPA,
CIT, Senior Tax Manager
 Estate
planning after death? This idea doesn't sound like something the
IRS would approve of.
Yet post-mortem estate planning tactics are absolutely acceptable and
potentially very helpful when properly employed. They are used by many savvy
estate planning professionals, and should definitely be considered by family
business owners when writing their wills.
Using qualified disclaimers is the most common way to achieve post-mortem
estate planning goals. Including disclaimers in a will is a powerful way to
allow survivors to adjust for current circumstances—including ever-changing
estate tax laws—that weren't considered when the will was originally drafted.
As the name implies, a disclaimer allows named recipients to "disclaim"
assets left to them in a will. For the purposes of estate planning,
"disclaiming" typically doesn't involve the rejection of assets for emotional or
personal reasons, but rather for financial reasons. Disclaimers generally serve
one simple purpose: to minimize taxes by redistributing assets.
A Look at the Law
Current federal law allows each person to leave unlimited assets to a spouse,
and gives each person a "unified credit" which equates to $2 million to leave to
others, without incurring estate taxes. In most cases, spouses leave everything
to each other in their wills. That's fine while the surviving spouse is alive.
But if the surviving spouse dies with an estate over $2 million, the surviving
heirs—children and grandchildren—could then be faced with an enormous tax
bill.
To alleviate this potential problem, disclaimers in the first spouse's will
could be used to redistribute the assets in a more tax-friendly way. For
example, the will could state that all assets go to the surviving spouse except
those he or she disclaims, which could be put into a trust for the children. Or
the will could state that disclaimed assets should be distributed to a family
foundation or other charity. Either way, the surviving spouse is able to make
decisions about asset distribution based on current law and current family
circumstances.
Disclaimers can be used to minimize estate, gift and transfer taxes; to
optimize the marital deduction; to qualify a trust; or to avoid the
generation-skipping transfer tax. Of course, to be effective, disclaimers must
be worded properly and follow the letter of the IRS code and state regulations.
According to IRC Section 2518(b), a disclaimer is an "irrevocable and
unqualified refusal" by a person to accept an interest in property, but it is
generally valid only if:
- the refusal is in writing,
- it is received by the executor no later than nine months after the death
of the person leaving the bequest,
- the disclaimant has not accepted the interest or any of its benefits, and
- the interest passes to someone other than the disclaimant.
Because disclaimers allow beneficiaries to make important decisions about how
bequests are actually distributed, it is helpful if the estate planning intent
of the decedent is known by the disclaimant. When possible, both beneficiaries
and disclaimants should be involved in discussions with trusted attorneys and
accountants to ensure that the disclaimers are understood and can be used as
designed.
If you would like more information about the use of disclaimers in estate
planning, or would like to talk about other techniques, please don't hesitate to
call or email me at paula@bobermarkey.com,
or call your partner/manager contact with the firm.
BMF&C
Need A Family Tune-Up?
Consider An Outside Counselor
By Cindy S. Johnson, CPA,
CIT, Partner
 Running
a business is a challenge in its own right. Add in difficult
family dynamics and it can get even tougher. Working together
often exacerbates family relationship challenges, such as
cousins who don't see eye-to-eye...parents and kids unable to
make good decisions due to age-old discord...grandparents who
won't let go.
Although a CPA or other trusted advisor can handle a wide variety of business
situations, sometimes a situation calls for a different skill set. In cases
where typical advisors aren't successful in resolving relationship issues, it
may be best to call in an expert in workplace psychology and interpersonal
development to help manage issues outside a CPA's or attorney's purview.
A neutral third party can assess business and family dynamics with a fresh,
unbiased eye. He or she can help iron out family issues relative to the
business, or business issues relative to the family. A person trained in
organizational psychology (see sidebar) has appropriate training to work on both
short- and long-term concerns.
Some families may be hesitant to call on an outside counselor because it may
be perceived as a sign of weakness that the family can't manage its own
problems. However, nothing could be further from the truth. In fact, it requires
a lot of strength to request help in tackling challenges and resolving difficult
situations.
Here's a look at common situations that might trigger a call to an
organizational psychologist:
Family dysfunction: is yours the family that put the "fun" in
"dysfunction"? Sometimes family groups go through difficult periods when they
just don't function well. An outside counselor can quickly assess roles and
dynamics and guide the family to get back on track.
Fair treatment: sometimes family members have different expectations
about how they should be treated relative to their participation in the
business. A third party can help clear the air and make sure expectations match
reality.
Management succession: passing management responsibilities onto the
next generation is a huge milestone for a family business. It can be very
helpful to have an outsider involved in the process. He or she can assess
leadership capabilities, create a transition plan and help manage the emotional
side of the change.
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What Is An Organizational
Psychologist?
Typically, an organizational psychologist holds a
Ph.D. in Psychology and has a particular interest in and focus on workplace
issues. Also called a business psychologist, industrial psychologist or
social psychologist, he or she can consult on a wide range of issues, from
psychological testing and job analysis to motivation, selection and
promotion. |
Addiction issues: family businesses can be quickly destroyed by the
addiction problems of a family member. A trained professional can offer counsel
about how to handle this highly volatile issue, providing options for the
addicted relative as well as solutions for the rest of the family and non-family
employees.
Mental health problems: no business is immune to potential disruption
caused by an employee's depression, bipolar or obsessive-compulsive disorder or
other mental health condition. But in a family business, it's especially
complicated when a family member is experiencing the potentially devastating
effects of these conditions. A psychologist knows the most effective steps to
take to get on the path to healing, both for the affected individual and the
relatives and coworkers who deeply care for him or her.
When selecting a psychologist to work with your business, "fit" is important.
Approach the process as you would any other interviewing and hiring assignment.
It's crucial that everyone feel comfortable with the psychologist's
qualifications, manner and attitude. And don't feel like you can only call on
this person in times of crisis. An annual "check-up" may be just what you need
to remain a healthy, high-functioning family business.
If you would like a referral to an organizational psychologist, please feel
free to call or email me at
cindyj@bobermarkey.com. BMF&C
Liability Insurance: Are You
Covered?
By Lori A. Sheets, CPA,
Senior Manager
 As
you're well aware, there are many risks that come with owning
and operating a business. One of the most overlooked risks of
business ownership is liability risk. Businesses face a variety of different types of liability risk,
such as injury claims, property damages, negligence,
malpractice, employment practices, and advertising claims, to
name just a few. The good news is there are both broad and
specific types of liability insurance to protect businesses from
practically every conceivable kind of liability risk.
CGL: Covering the Basics
The broadest type of business liability policy is what's known as a
Commercial General Liability (CGL) policy. This typically includes coverage for
such liabilities as personal injury and property damage, but differs from
company to company. A CGL policy may provide all the liability coverage many
businesses need.
How much general liability insurance should you purchase? A good rule of
thumb is $1 million of coverage for every $2 million in sales revenue. You can
supplement this with a high-deductible umbrella policy for additional liability
protection, which is usually sold in increments of $1 million. Business umbrella
policies are more expensive than personal umbrellas, but the more coverage you
buy, the lower the incremental cost of coverage.
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What's Your Form of
Ownership?
Your form of business ownership may have an impact
on your potential level of business liability risk.
If you are incorporated—whether as a C corp or S
corp—or organized as a Limited Liability Company (LLC), your personal
liability for losses, debts and obligations related to the business will be
limited to the amount of your capital investment in the business, with some
exceptions. Because a corporation is viewed as a separate legal entity from
the owner (a distinction known as the "corporate veil"), the owner's
personal assets are shielded from any business financial liability.
However, this applies only to the business'
financial obligations. Owners may still be held liable for their own actions
in their professions—physicians, for example, can still be sued for
malpractice, regardless of their corporate status. Owners of corporations or
LLCs can also be held personally liable if they've signed a personal
guarantee for a business loan, have personally injured someone, or have
acted in an irresponsible or illegal manner.
In today's litigious society, the reality is that
anyone can be sued for practically anything, so it's wise to limit your
personal liability exposure by obtaining as much coverage as you can
reasonably afford. Insurance is the only equalizer to litigation and
potentially crippling judgments and losses. |
Other Types of Coverage
Other common types of liability insurance include:
- Professional Liability: Also known as errors and omissions (E&O)
insurance, this protects anyone who provides a service against liability
arising from negligence, errors, or omissions in the performance of their
professional service.
Several common types of professional liability insurance are medical
and legal malpractice; technology and cyberspace liability; and architects,
engineers, and accountants liability. Note: Make sure that your E&O policy
includes coverage for legal defense costs, which can be substantial, even if
you prevail in court.
- Product Liability: This provides protection for companies that
manufacture or sell a product against liability arising from a person becoming
injured as a result of using the product. Whether coverage is necessary, and
how much, will vary greatly, depending on the type of product.
- Employment Practices Liability (EPLI): This will protect against
lawsuits or administrative charges initiated by employees claiming harassment,
discrimination, or wrongful termination.
- Directors and Officers (D&O) Liability: This will protect your
company's outside directors and officers from personal liability should a
lawsuit be filed alleging a wrongful act in connection with the company's
management. D&O policies usually include EPLI coverage as well. Specific D&O
policies are available for both for-profit businesses and not-for-profit
organizations.
- Hired and Unowned Auto Liability: When employees are driving for
business purposes, whether in their own vehicles or a company vehicle, their
personal auto insurance is usually primary. But if you have a large commercial
fleet or a large salesforce, you might want to consider additional auto
liability coverage.
- Advertising Liability: This will protect against lawsuits alleging
that you made false or misleading claims or representations in your company's
advertising or marketing materials.
The bottom line: Every business' liability exposure will be different, so
there's no one-size-fits-all formula for business liability coverage. Consult
with an insurance broker or agent to assess your company's potential exposure
and the most appropriate types of liability insurance to protect you. If you
would like a referral to a broker or agent, please feel free to call or email me
at loris@bobermarkey.com, or call
your partner or manager contact. BMF&C
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In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
James M. Bowen,
CPA, MT
Partner—Taxation Services |
Jim brings extensive experience in servicing both private and public
companies in a variety of industries including manufacturing, distribution, real
estate, banking, and professional service companies. With more than 20 years of
public practice, Jim has served in a multitude of disciplines including tax,
audit, business consulting, financial systems, business valuations, and
strategic planning.
Since 1990, Jim has focused his attention in the area of taxation. In 1991,
he earned his Master of Taxation from The University of Akron, where he also
earned his undergraduate degree in accounting. Over the years, Jim has
identified and implemented scores of tax planning strategies for both private
and public companies. Jim has worked extensively in the areas of IRS practice
and procedure, state and local income taxation, real and personal property tax,
sales and use tax, tax abatements and incentives, mergers and acquisitions, and
tax accounting methods and periods. He also has significant experience in the
accounting for income taxes, tax risk management, and the establishment of
tax-based internal controls.
Prior to joining BMF&C in 2003, Jim was a principal with Ernst & Young where
he served as the area leader for its tax operations practice.
Jim currently serves on the Public Companies Task Force for PKF North
American Network, an association of independent accounting firms of which BMF&C
is a member. He also serves on three separate boards with The University of
Akron—the National Alumni Board, the Accountancy Advisory Board, and the
Masters of Taxation Advisory Board.
"I'm immensely proud of the quality of our tax practice at BMF&C. Regardless
of the service being rendered or the complexity of the client's needs, our tax
professionals consistently perform at a superior level. My confidence is
affirmed by our continued growth in the number of tax professionals, services
offered and clients." BMF&C
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