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A P R O F E S S I O N A L D E V E L O P M E N T J O U R N A L f o r t h e C O N S U L T I N G D I S C I P L I N E S

the value examiner July/August 2015

JULY/AUGUST 2015

Equity Crowdfunding

ValEx J-A 2015b.indd 1 8/4/15 9:16 AM

On The Cover In This Issue…

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THE S VALUE PREMIUM—BENEFIT OR BOONDOGGLE?By Sarah von Helfenstein, MBA, CVAAs a profession, business appraisers continue to chew on the issues surrounding the value advantages or potential impact derived from the tax attributes of pass-through entities (PTEs—in particular, S corporations) v. those of C corporations. After some years of trying different paths through the thicket, this author has identified a number of anomalies in current practice that make the resulting PTE premium questionable.

WHAT THE DAUBERT TEST MEANS TO A FINANCIAL EXPERTPART TWO: DAUBERT’S EFFECT ON THE FEDERAL COURTSBy Joryn Jenkins, Esq., and Michael J. Mard, CPA/ABV © Copyright 2015 by authors. Used with permission by The Value Examiner In Part One of this series, we discussed how Daubert has increasingly replaced Frye as the standard for admitting expert scientific testimony in trials and highlighted some significant cases in the most recent state to adopt Daubert—Florida—as its standard. In Part Two, we discuss how, once a financial expert develops his/her hypothesis and assertion, that opinion is empirically tested. The guidance is provided by the federal courts, in which the Daubert test originated and has been the standard for more than twenty years.

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The Growth of Equity Crowdfunding: Crowdfinance

Options For Private Companies—and Secondary Markets For Investors—Will

Keep Expanding

By David M. Freedman, Editorial Adviser, The Value Examiner and

Matthew R. Nutting, Esq

Most Americans either don’t know what crowdfunding is or still think crowdfunding is narrowly confined to Kickstarter and other rewards-based fund-raising websites. In polite company, the terms "securities crowdfunding" or "equity crowdfunding" typically evoke bewilderment, derision, or fear of fraud. Meanwhile, start-ups and growing companies have raised tens of billions of dollars through Internet-based equity crowdfunding platforms. In this article, Dave Freedman, former editor of The Value Examiner and Matthew R. Nutting, Esq, coauthors of Equity Crowdfunding for Investors (John Wiley & Sons, Inc.; Hoboken, New Jersey, 2015), gives an overview of how equity crowdfunding could change the investment world.

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the value examinerJuly/August 2015

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Donald Price, CVAKeith Sellers, CPA/ABV

Sarah von Helfenstein, MBA, CVAThe Value Examiner® is a publication of:

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A L L S U B M I S S I O N SThe Value Examiner is devoted to current, articulate, concise, and practical articles in business valuation, litigation consulting, fraud deterrence, matrimonial litigation support, mergers and acquisitions, exit planning, and building enterprise value. Articles submitted for publication should range from 500 to 3,000 words. Case studies and best practices are always welcome.S U B M I S S I O N S T A N D A R D SAll articles should be thoroughly edited and proofread. Submit manuscript by e-mail (in standard word processing format) to Nancy McCarthy: [email protected]. Include a brief biography to place at the end of the article and a color photo of the author. See authors’ guidelines and benefits at www.nacva.com/examiner/Publishing_Articles.pdf. The Value Examiner accepts some reprinted articles, if accompanied by appropriate reprint permission.R E P R I N T SMaterial in The Value Examiner may not be repro-duced without express written permission. Article reprints are available; call NACVA at (800) 677-2009 and/or visit the website: www.NACVA.com.

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L I T I G A T I O N C O N S U L T I N G

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Summaries and analysis of the most important cases that involve valuation and expert testimony issues, in both federal and state courts.


PRACTICING SOLOBy Rod P. Burkert, CPA/ABV, CVA

The author interviews sole practitioner Chris Mutchler, CPA, CVA, CFE, from Bramerton, Washington.

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E D U C A T I O N R E V I E W

BACK TO BASICSFORENSIC COMPARISON OF VARIOUS FORMS OF OWNERSHIPBy John T. Alfonsi, CPA/ABV, CFF, CFE, CVA, MST, and Walter M. McGrail, JD, CPAThis column serves as a refresher on some of the basics of valuation. It features information from practitioners, lecturers, and educators from within the NACVA community.

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V A L U A T I O N

The Growth of Equity CrowdfundingCROWDFINANCE OPTIONS FOR PRIVATE COMPANIES —AND SECONDARY MARKETS

FOR INVESTORS—WILL KEEP EXPANDINGBy David M. Freedman, Editorial Adviser to The Value Examiner and Matthew R. Nutting, Esq.

•

•

Most Americans either don’t know what crowd-funding is or still think crowdfunding is nar-

rowly confined to Kickstarter and other rewards-based fundraising websites. In polite company, the terms “securities crowdfunding” or “equity crowdfund-ing” typically evoke bewilderment, derision, or fear of fraud, oh my.

Meanwhile, start-ups and growing companies have raised billions of dollars through equity-based offering platforms on the Internet.1 Some exuberant pioneers in this new investment class have predicted that crowdfunding will spark a revolution in private capital markets, if not the redefinition of Wall Street.2

A moderate optimist, and one with whom we agree, is Duncan Niederauer, CEO of NYSE Euronext (a merger of

1 Equity-based offering platforms, featuring Regulation D offerings, were at first reluctant to call their operations “crowdfunding” because (before June 2015) they were not open to the “crowd” of nonaccredited investors. The SEC generally uses the term equity crowdfunding portals in reference to Title III of the JOBS Act of 2012, which allows nonaccredited investors to participate, but which has not yet been implemented. Gradually, however, Reg. D platforms have come to be referred to in the media, and in the crowdfunding industry as well, as equity crowdfunding platforms.2 A December 17, 2013, conference in New York City, cosponsored by Thomson Reuters, was called “Crowdfinance 2013: Redefining Wall Street.”

the New York Stock Exchange and Euronext NV). Niederauer predicted that equity crowdfunding, if properly done, “will become the future of how most small businesses are going to be financed.3” Mary Jo White, the SEC chair since April 2013, said that crowdfunding is “the start of what promises to be a period of transformative change in capital formation.4" If equity crowdfunding goes well for issuers and investors, a surging supply (of early-stage equity offerings) and demand (for investment opportunities in those offerings by investors who want to diversify into alternative asset classes) could result in not only phenomenal growth of private capital markets but also “transformative” innovations. Innovation might include not only Web technology that better connects issuers to investors and facilitates disclosures and transactions, but also simplified deal terms, automated valuation “calculators” (see sidebar on page 10), and new business entities (like a Subchapter CF corporation) structured specifically for equity crowdfunding transactions.

3 “The New Thundering Herd,” The Economist, June 16, 2012, p. 714 Mary Jo White, SEC chairwoman, speech to the 41st Annual Securities Regulation Institute, Coronado, California, January 27, 2014

THE “NEW” NEW INTERMEDIARY

Crowdfunding is a method of collecting many small contributions, by means of an online funding platform, to finance or capitalize a popular enterprise. Thanks to the phenomenal success of rewards-based crowdfunding platforms like Kickstarter and Indiegogo since 2008, and donation-based sites like GoFundMe since 2010, it was only natural that intermediaries in the angel capital world would exploit and adapt the crowdfunding platform infrastructure, harnessing the power of social networking and e-commerce to accomplish the following objectives:

• Unite start-ups and growing companies with angel investors

• Announce equity offerings, and disclose risks and deal terms

• Enable potential investors to collaborate with one another on deal selection and due diligence

• Facilitate investment transactions. • Accomplish all of that in a matter

of weeks or days, sometimes even hours, at little cost

The Jumpstart Our Business Startups Act of 2012 accelerated the growth of equity crowdfunding. Title II of the JOBS

7



Act lifted the ban on general solicitation for securities offerings under Regulation D, Rule 506(c), which allows equity crowdfunding platforms to advertise those offerings, and thereby publicize equity crowdfunding itself, much more widely than before. On-platform Reg. D offerings are still open only to accredited investors, about seven percent of the population.

Title III of the JOBS Act will someday let nonaccredited investors, the other ninety-three percent, participate in private securities offerings, but this exemption (also called Regulation CF) has not yet become effective. The SEC may issue final rules under Title III this year, although it is possible that Congress will revise Title III before the SEC blesses it. The U.K. and Australia are way ahead of the United States in letting average or “unsophisticated” investors participate in equity crowdfunding, but investor demand for crowdfunded securities is still fairly weak in those countries.5

Title IV of the JOBS Act, which became effective in June 2015, does allow nonaccredited investors to invest in “Regulation A+ offerings,” some of which will be made via crowdfunding platforms. The Title IV exemption is structured primarily for growth- and later-stage companies that want to file “mini-IPOs,” not ideal for seed-stage start-ups since compliance costs alone may overwhelm the amount of capital being sought.

Another form of equity crowdfunding is the intrastate securities exemption,6

5 Richard Swart, “Challenges in SME Access to Capital,” Roosevelt Institute, July 6, 2015 (https://nextamericaneconomy.squarespace.com/thought-briefs/2015/7/7/challenges-to-sme-access-to-capital)6 Under Section 3(a)(11) of the Securities Act of 1933

where issuers with headquarters in a particular state may sell securities to all investors (nonaccredited as well as accredited) who live in that state. At this moment, at least seventeen states have such exemptions in place, and at least one more is awaiting the governor’s signature. Some of these exemptions are variations of Title III of the JOBS Act, in terms of the dollar limits on raises and investment limits for nonaccredited investors.

Securities crowdfunding also includes peer-to-peer lending (P2P), more recently known as marketplace lending because true peers (individuals) are being overwhelmed by institutional lenders. Debt-based crowdfunding is a hot sector of the securities markets in the United States and some other countries, including China.

REGULATION D PLATFORMSIssuers have raised tens of billions of

dollars through Reg. D offering platforms since they launched in 2011 in the United States. These early-equity offerings used the Rule 506 exemption under Reg. D. That was before the JOBS Act, which most argue will boost overall volume of capital formation, now that the non-solicitation rules have been relaxed.

What Title II of the JOBS Act did was prompt the SEC to split Rule 506 into parts:

• Rule 506(b) is the “traditional” part, also known as the “quiet deal,” because it retains the ban on general solicitation. For off-platform offerings it permits up to thirty-five non-accredited investors to participate in each deal. This is where many high-tech start-ups have tended to congregate.

• Rule 506(c) is the “new” part, because

it lifts the ban on general solicitation. But only accredited investors may participate, on- or off-platform. This is where consumer product and retail companies tend to congregate.

Title II went into effect in 2013 with the full implementation of SEC regulations. Now you might see 506(b) offerings, 506(c) offerings, and Reg. A+ offerings all listed on the same equity crowdfunding platforms. But the tendency among successful platforms these days is to specialize in one kind of exemption or another. So, for example, you will see some tech-oriented crowdfunding platforms with predominantly 506(b) “quiet deals.” Consumer product companies naturally tend to gravitate to platforms that focus on 506(c) deals. You will also find platforms that focus on particular industries, such as real estate—which is the hottest sector of securities crowdfunding after P2P.

According to Crowdnetic’s Q1 2015 Report,7 in the first quarter of 2015 alone, the seventeen most prominent securities offering platforms (not including P2P) in the United States recorded capital commitments totaling about $650 million—a thirty-five percent increase from the previous quarter. These figures represent the performance of offerings under Rule 506(c); they do not include Rule 506(b) offerings, some of which are listed on crowdfunding platforms as well. It is likely that the numbers of 506(b) offerings, and the amount of capital raised thereby, are higher than that of 506(c) offerings. Rule 506(c) allows general solicitation, while Rule 506(b) does not.

7 http://www.crowdnetic.com/reports/apr-2015-report (accessed July 8, 2015)

8



Significantly for the valuation profession, the types of securities offerings that received capital commitments were: equity (sixty-two percent), convertible debt (twenty-two percent), straight debt (nine percent), and other (seven percent). The capital structure of crowdfunding offerings “remains relatively consistent with previous quarters,” says Crowdnetic.

REGULATION A+ MINI-IPOSUnder Title IV, the moribund

Regulation A exemption was expanded from a five-million-dollar raise limit to a fifty-million-dollar limit, and for raises above twenty-million-dollars (Tier 2 offerings) it preempts blue sky review (i.e., no need for approval by every state in which the offering is made). Blue sky review is still required for offerings less than twenty million dollars in Tier 1. For more details, see the SEC’s “Fact Sheet:

Regulation A+” at http://www.sec.gov/news/pressrelease/2015-49.html.

Some Regulation A+ offerings will be listed through online offering platforms. Such platforms may be dedicated to Reg. A+ offerings, or they may feature a mix of Regulation D and Regulation A+ offerings. Neither Reg. D nor Reg. A+ offerings are required to go through intermediaries, though.

Before the JOBS Act, Regulation A issuers could sell unrestricted securities to nonaccredited as well as accredited investors. The expanded Reg. A+ still lets nonaccredited investors participate, but it limits their annual investment in offerings higher than the twenty-million-dollar threshold to ten percent of their income or net worth, whichever is greater. All investors can invest an unlimited amount in Tier 1 offerings up to twenty million dollars.

Professionals in the securities industry are calling Reg. A+ offerings “mini-IPOs,” as issuers are required to go through a scaled-down registration process and file a prospectus-like document called an “offering circular” with the SEC. The benefits of Reg. A+ for seed-stage and start-up companies seem limited mainly because offerings up to twenty-million-dollars still require blue sky review and compliance, which can be costly and time-consuming. Time will tell whether seed-stage and start-up companies try to take advantage of Reg. A+ rather than (or in addition to) Reg. D, intrastate, or someday Title III equity crowdfunding.

“We are still at the first pitch in the first inning of the equity crowdfunding ball game,” says Madelyn Young, content development manager at EarlyShares, a Reg. D platform based in Miami, Florida. Over the next few years we will see how

KINDS OF EQUITY OFFERINGS ON INTERNET-BASED PLATFORMS

Online LaunchRaise Limit per

YearInvestor Status Investment Limit

Intermediary

Required?

Reg. A+ Tier 1 2015 $20 million All investors No limit

NoReg. A+ Tier 2 2015 $50 million All investors

Depends on

income/worth

Reg. D Rule 506(b) 2011No limit Accredited only No limit No

Reg. D Rule 506(c) 2013

Intrastate Equity

Crowdfunding

2013 (Georgia

was first)

Typically $1m to

$2mAll investors

Depends on

income/worthVaries with state

Title III Equity

CrowdfundingMaybe 2016 $1 million All investors

Depends on

income/worth

Yes: online

portals*

* Title III offerings may appear on non-broker-dealer funding portals that are registered with the SEC or on broker-dealer platforms.

9



the various JOBS Act financing schemes really work, what kinds of companies use which exemptions, and how investors perceive value in each new opportunity.

FRAUD AND CROWD WISDOMOf course fraud is everywhere, and

it will infect crowdfunding. So far, though, equity crowdfunding has been remarkably fraud-resistant, not only in the United States but also in the U.K. and Australia.

Equity crowdfunding issuers and funding platforms are subject to the antifraud provisions of federal securities law. (Intrastate platforms are subject to state and federal antifraud laws.) Platforms that are broker-dealers have an even higher standard for screening out fraudulent offerings. Beyond the legal framework, however, all crowdfunding platforms have something in common that is transformational in terms of fraud prevention: a very powerful social networking component that includes various kinds of discussion forums. Crowds—of donors, backers, or investors—discuss, evaluate, and collaborate (on due diligence, for example) throughout funding platforms.

Ethan Mollick, assistant professor of management at the Wharton School, University of Pennsylvania, concluded in a 2013 study of 48,500 Kickstarter (rewards-based, not equity-based) campaigns that “less than one percent of the funds in crowdfunding projects in technology and product design go to projects that seem to have little intention

of delivering their results.”8 Mollick believes that the low rate of fraud (at least this particular type of fraud) is a result of “the influence of the community,” by which he means the ability of backers and prospective backers to interact with one another on- and off-platform, and with the campaigner/issuer on-platform via open Q&A forums.

Such discussions are similar to those that “take place on other social media sites, blogs, and forums, [as well as] Wikipedia and open-source software development,” writes Mollick, whose main areas of study at Wharton are innovation and early-stage entrepreneurship. “These communities play several important roles in improving offerings, preventing fraud, and making crowdfunding successful. In the case of Kickstarter, communities have successfully detected fraudulent projects.”

The kind of fraud Mollick addresses in his 2013 study is what we call “take the money and run.” To be sure, there are other kinds of fraud in the context of crowdfunding that he does not address, including intentional or negligent misstatement or omission. But Mollick clearly believes in the wisdom of crowds, in the context of both rewards-based and equity-based crowdfunding.

SECONDARY MARKETS FOR CROWDFUNDED SECURITIES

Crowdfunded equity investments are generally illiquid because there is no organized secondary market for

8 Ethan R. Mollick, PhD, “The Dynamics of Crowdfunding: An Exploratory Study,” Journal of Business Venturing, 2013. Available at http://papers .ssrn.com/sol3/papers .cfm?abstract_id=2088298&http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298

crowdfunded shares. Secondary markets will emerge, however, not only for private securities in general, but some for crowdfunded shares specifically, as securities crowdfunding grows and evolves.

Congress and the SEC are exploring the idea of allowing venture exchanges to facilitate trading of securities issued by small companies. The proposed Main Street Growth Act, for example, would permit venture exchanges to connect buyers and sellers of small-company securities, but not to process transactions between those parties. The act defines small companies as those—both public and private—with assets under two billion dollars.

CFX Markets will be the first secondary market for crowdfunded shares specifically. CFX “provides an open and secure network to facilitate secondary market transfers of private securities in alternative asset classes” strictly for accredited investors. (See details at http://www.joincfx.com.) It is owned by PeerRealty, a real estate securities crowdfunding platform based in Chicago, Illinois, but it will list crowdfunded shares originating on other platforms as well, including PropertyStake (real estate), CrowdFranchise (franchises), and more in the future.

ACCREDITED INVESTORS PREDOMINATE

Because Reg. A+ is brand-new and intrastate securities crowdfunding is slow to emerge, the equity crowdfunding world is still occupied mainly by accredited investors under Reg. D. This might be

10



comforting to some regulators and investor protection groups, and maybe to some accredited investors who don’t want the world to change.

The world will change. Title III is not dead, though it seems to be hibernating. More states will enact or promulgate intrastate exemptions that welcome nonaccredited investors, with investment limits based on their net worth or income. Some of the exclusive bastions of private securities will be blown wide open, and small, inexperienced angel investors will flood in, some wisely and some recklessly, funding all manner of start-ups. The private capital markets will shudder. This is good. VE

EQUITYNET’S STARTUP VALUATION CALCULATOROne of the pioneers in equity-

based offering platforms in the United States, EquityNet calls itself a “capital marketplace,”—with 17,000 private businesses seeking more than two billion dollars in equity and debt investment capital. The company’s platform offers two versions—one free and the other fee-based—of its automated Valuation Calculator.

According to Judd Hollas, founder and CEO of EquityNet, the fee-based valuation tool uses “hundreds of parameters” for the company being valued, and estimates a valuation based on the discounted cash flow method and correlations with data provided by the 17,000 “peer group” companies in EquityNet’s database. These peers are privately held companies that have registered to have their securities offerings listed

on the platform since 2005.The free, “public” version of the

calculator, available at https://www.equitynet.com/crowdfunding-tools/startup-valuation-calculator.aspx, is radically scaled down, with only eight parameters, yielding a “quick ballpark valuation figure.”

Hollas says the fee-based version is being used by companies ranging from seed-stage start-ups to those with $100 million in revenue. It is not necessarily intended to eliminate the need for professional valuation analysis. EquityNet, based in Fayetteville, Arkansas, holds a patent for an “electronic system for analyzing the risk of an enterprise” (US 8,793,171 B2 dated July 29, 2014) that is integrated into the valuation calculator.

David M. Freedman, a financial and legal journalist since 1978, has served on the editorial staff of The Value Examiner since 2005.

Matthew R. Nutting is a corporate lawyer with Coleman & Horowitt in Fresno, California.

Freedman and Nutting are coauthors of Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms (Wiley & Sons, June 2015). Website: www.ec4i.com

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V A L U A T I O N

The S Value Premium—Benefit or Boondoggle?

By Sarah von Helfenstein, MBA, CVA

•

• . . . [T]he most significant tool for an analyst to keep in mind when valuing a pass-through entity or interest in one—it needs to make sense1.

To approach the valuation of a pass-through entity, the analyst must initially know the base that he or she is starting from in order to know what he or she is making adjustments to2.

The main point of this debate is the extent to which tax benefits create value3.

As a profession, business appraisers continue to chew on the issues surrounding the value advantages or potential impact derived from the tax attributes of pass-through entities (PTEs—in particular, S-corporations) v. those of C-corporations. Much thoughtful research and analysis has been performed and published. Models

1 Hitchner, James R. (2011) Financial Valuation: Applications and Models, 3rd Edition. Hoboken, NJ: John Wiley & Sons, Inc. p. 573

2 Ibid. p. 5813 Ibid. p. 586

have been proposed and widely used. Debates have been held in court and out. However, all this activity has resulted in a thicket of theory and practice that is challenging to maneuver with clarity and common sense.

After some years of trying different paths through the thicket, this author has identified a number of anomalies in current practice that make the resulting PTE premium questionable. They can be captured in the following questions:

1. The fundamental question: “Should there be a premium applied to the S corporation whose value has been determined relative to the publicly traded C data by which it has been valued4?”

2. Corollary Q1: Are the assumptions we use to compare S and C attributes reasonable? Do they make sense?

3. Corollary Q2: If not, what might we use instead?

4. Corollary Q3: Is the perceived S value premium a real benefit that we must quantify, or a boondoggle?

We will attempt to answer these questions

4 Ibid. p. 584

by exploring our standard assumptions and comparisons in light of the real world and offering alternative suggestions where warranted. Our inquiry will begin with some abbreviations and assumptions. We will then pull apart and explore the S corporation puzzle piece by piece.

ABBREVIATIONSFor simplicity, we will abbreviate

certain terms, as follows:

• S refers to S-corporations and other pass-through entities (PTEs)—all privately held.

• C refers to publicly-held C-corporations. • S premium refers to the value premium

associated with S-corporation (and other PTE) tax attributes.

• Investor, shareholder, and owner refer to the parties that hold ownership interests in publicly and privately held companies. We use them interchangeably.

ENTITY—“OTHERWISE IDENTICAL”

Assumption: It is possible to construct a substitute C that has the tax attributes of a publicly-held company (in order to match the rates of return data we use from the

13



public markets) but is “otherwise identical” to the subject S.

But, is this realistic? We can apply C tax rates to the S

benefit stream. And, we can adjust the debt segment of the WACC (if we are using one) to reflect an industry capital structure instead of the S capital structure. Yet, as we know, foundational dissimilarities still remain between a C and an S. To name a few: number and types of shareholders and their personal goals for the entity; shareholder involvement in managing the entity; broad access, or lack of it, to capital for growth; differences in attitudes toward the use of debt in the capital structure; differences in strategic and operating intent and focus; level of regulatory oversight and market interest.

The valuation profession takes pride in its precise use of terminology and careful matching of analytic components. In keeping with this important tradition, we suggest that the term “otherwise identical” sets up a level of stringency for our comparison of the subject S and constructed C that is neither realistic nor useful in exploring the need for an S-premium. The term “proxy” is sufficiently precise.

INVESTORSAssumption: We can and must match

subject S and proxy C investor tax attributes and expectations in order to calculate the S-premium.

We would all agree that C and S investors operate in separate universes. But, some of our S- premium assumptions rely on matching subject S and proxy C investor tax attributes and expectations. Can we accomplish this given the following facts?

Today, institutional investors own the largest holdings in and exercise great influence over the publicly -traded securities markets. These include pension funds (not

taxed),; corporations (insurance companies primarily— – tax favored),; mutual funds (taxed),; and hedge funds and other pooled funds (taxed).

. . . [I]nstitutional investors with a preference for large, liquid stocks have steadily come to control a growing share of the public market. Total institutional equity holdings represented 28.4 percent of the total U.S. markets in 1980, rocketing to 50.6 percent of the total U.S. market by 2009. . . . While institutional investors have increased their holdings in the public market overall, the magnitude of investment in small stocks has been rapidly rising. Since 1980, institutional investors have decreased their holdings in large stocks in favor of smaller stocks. The percentage of microcap stocks owned by institutions grew from 11.9 percent in 1980 to 68.2 percent in 2010, as institutions displaced individual investors across the entire public market. . .

This shift in stock market ownership has had implications for stock prices and returns5.

As for individuals who invest for themselves in the public markets, a few, like Warren Buffet, invest on a large scale through their own personal entities. At the other end of the spectrum, credible academic research hypothesizes that “. . . individual investors treat trading as a fun and exciting gambling activity, implying substitution between this activity and alternative gambling opportunities.”6 Both

5 Fannon, Nancy J., and Sellers, Keith F. (2015) Taxes and Value. Portland, OR: Business Valuation Resources LLC. pp. 36, 37-38

institutional and individual investors in the public markets have fully diversified portfolios and trade in and out of ownership positions regularly, executing limited buy-and-hold strategies.

In contrast, S investors are individuals and certain related-party entities of those individuals. Most are likely to be both an owner and an executive officer. Their investment – the company – is often the single most valuable asset in their relatively undiversified portfolio. This asset may be held for several family generations and represent substantial family wealth.

How, then, can we perform any meaningful comparison or matching of these investor groups?

We suggest that, as dissimilar as they are in most respects, C and S investors have two fundamental goals in common; (1) stable investment returns (current income and/or longer-term capital appreciation) and, (2) the avoidance or minimization of taxes. It is these crucial commonalities that allow us to compare and match C and S investor tax attributes when addressing the S premium debate.

BENEFIT STREAM—DEVELOPING THE BASE TO BE VALUED

Assumption: To perform an S valuation, we must use C rates of return with S flows. However, C rates of return embed shareholder expectations for all entity and shareholder-level taxes. This automatically makes them a mismatch to the S benefit stream being valued, from which no payment of taxes will be made at the entity level and only income tax will be paid at the shareholder level. Thus, we must adjust the base to be valued.

6 Xiaohui Gao and Tse-Chun Lin. (2014) “Do Individual Share holders Treat Trading as a Fun and Exciting Gambling Activity? Evidence from Repeated Natural Experiments” Oxford University Press

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Our current technique follows:

1. We turn normalized S entity-level, pre-tax net income into proxy C entity-level after-tax net income by applying C income taxes at the statutory rate.2. From proxy C net income, we develop net cash flow which becomes the benefit stream base to be valued. 3. To this we add an S-premium for dividend and capital gains taxes

avoided and an adjustment for the differential between C-corporate and S-individual statutory income tax rates.C Shareholder-Level Taxes

We suggest that this process is flawed in several important ways.

First, we suggest that both the dividend and capital gains tax effects that are supposed to play a major role in obtaining an “otherwise identical” C

benefit stream and in quantifying the S-premium, are questionable. If we can justifiably eliminate these tax effects, we could immediately simplify our model. Let us try.

C SHAREHOLDER-LEVEL TAXES

D ividend s , D i str ibutions , Dividend Taxes

To begin this discussion, we compare C and S dividends, distributions, and dividend taxes.

TABLE 1: COMPARISON OF C AND S DIVIDENDS, DISTRIBUTIONS, AND DIVIDEND TAXES

C Dividends S Distributions

Dividends are distributions of after-corporate-income-

tax profits.

Distributions are made from after-individual-income-tax

profits.

May not be desirable to shareholders because:

• They are taxed. • Shareholders can create their own “dividends” through

proper portfolio mix. • They can defer or eliminate important reinvestment in

the company.

May not be desirable to shareholders because:

• They can defer or eliminate important reinvestment in the company.

May be desirable to shareholders because:

• They may be taxed at lower rates than either compensation or capital gains.

• They provide security for shareholders who prefer certain current income to uncertain future gains.

May be desirable to shareholders because:

• They can be used to pay individual income taxes on corporate profits.

• They can be deployed for personal initiatives outside the company, without having to pay additional taxes on them.

Can be paid regularly, on a “residual equity” basis, or not

at all.

Can be paid regularly, sporadically, or not at all.

Are a modest percentage of profits. At the extreme, could be 100% of profits. Most often a

much higher percentage than C dividends.

Per the February 2, 2014, WSJ, there are 5,008

companies listed on U.S. stock exchanges. Primarily only

the largest pay dividends7.

No data available on % of S corporations making

distributions or the level of distributions made.

The dividend tax is mitigated by presence of untaxed

and tax-favored institutional investors.

No dividend tax is paid on distributions.

7 h t t p : / / w w w. f a c t s e t . c o m / w e b s i t e f i l e s / P D F s / d i v i d e n d /dividend_3.17.15. As of March 2015, approximately eighty-one percent of the S&P 500 pay dividends. These are the 500 leading large-cap U.S.

companies, representing approximately eighty percent of total market capitalization.

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Plentiful market evidence indicates that not only are dividends of mixed interest to both C and S investors, but also that they are not always distributed, they are distributed at varying levels (but always modest for Cs), and dividend taxes paid by C shareholders may be close to zero, due to the presence of untaxed and tax-favored institutional investors8.

Furthermore, virtually 100 percent of the rate of return data we use for most S valuations comes from non-dividend-paying microcap portfolios, not the S&P 500. Higher rates of return for these portfolios are linked to size and risk rather than tax effects.

In addition, we commonly work under the fair-market value standard. We already normalize the historical financial information of the subject S to market in various ways. One of those normalizing adjustments is to add S distributions back to cash and the entity benefit stream under the assumption that a hypothetical buyer might make them in differing amounts or not at all. We then tax normalized pre-tax income at the individual statutory rate, “as though” the S is distributing cash to pay shareholder taxes. Why would we reasonably normalize out historical S distributions and then insist that our forecasts include them “as though” C dividends?

In conclusion, other than the S&P 500, actual C payment of dividends (and subsequent payment of dividend tax by investors) is uncertain at best and non-existent in the portfolios we use to value S-corporations. Thus, we suggest that the market rates of return we actually use do not reflect the payment of dividends

or dividend taxes. We also suggest that, under the FMV standard, forecasted S distributions should most reasonably reflect only payment of shareholder level income taxes. We conclude it is not meaningful to develop a proxy dividend tax on S distributions or a premium for dividend taxes avoided9.

Realistically, it appears that a market rate of return adjustment for the dividend tax effect is not material enough to be necessary.

CAPITAL APPRECIATION, CAPITAL GAINS, CAPITAL GAINS TAXES

What about capital gains? At the surface, C and S investors take capital gains and pay taxes on them quite differently. As one example, holding periods for C stock can range from a day to an average of 3.8 years (calculated over the period from 1926 to 2014), changing hands many times over a decade. However, S stock can be held for decades by the same investors.

In another example, under normal market and trading conditions, C capital gains will occur as small incremental changes in stock values. Based on investor portfolio strategies and clienteles, capital gains taxes may be an important issue for only certain investors. But the sale of S stock can create a one-time windfall gain in an undiversified portfolio that also generates a major tax event.

Digging below the surface, however, we see important similarities: both C and S investors can select holding periods at will; many intersecting factors that affect their selling choices; and both can delay

or mitigate capital gains taxes by various investing strategies.

Furthermore, C microcap portfolios (from which we get our market rates of return) are heavily weighted with thinly-traded securities. These experience above-average long-term capital appreciation over lengthy investor holding periods due to few available buyers. The capital gains tax attributes of Cs in these portfolios may be similar to, or even less favorable than, those of an S since the IRS allows the S to carry retained profits as “capital investments” that increase stock basis and diminish future capital gains tax exposure.

Given all this, we suggest that market capital gains and related taxes are not reasonably assured or quantifiable. Thus, quantifying an S proxy capital gains tax is only appropriate when it is known or knowable that the S will be sold in a stock sale within the five-year forecast period. Under any other scenario, an S-premium for capital gains tax savings is pure speculation and not defensible.

RATES OF RETURN — AN ALTERNATIVE ADJUSTMENT APPROACH

Suppose, however, we are uncomfortable with the entire prior line of reasoning and would prefer to simply adjust the market rate of return to match the S benefit stream. We could use the newly-minted Fannon-Sellers method to adjust our rate of return downward. This would remove the effects of embedded dividend and capital gains taxes, making adjustments to the benefit stream itself unnecessary.

Unfortunately, we find that the Fannon-Sellers sample calculation, based fully in market data, demonstrates a mere

8 Fannon and Sellers (2015) state that the research shows that the presence of institutional owners reduces the dividend tax premium by 57.21 percent.. p. 56

9 See Fannon and Sellers (2015), Chapter 8

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1.3 percent increase in the total rate of return for both taxes together. The academic research they cite indicates that even this small adjustment may be too large. We, thus, suggest that the effects on value of a market rate of return adjustment for dividend and/or capital gains tax is de minimis. It could defensibly be ignored.

THE FATAL FLAWWhile we believe these arguments

against dividend and capital gains tax effects are compelling, there is another —fatal—flaw in our process that needs to be addressed.

Currently, when we develop the benefit stream to be valued, dividend and capital gains taxes are not deducted from proxy C entity-level cash flow, because they are not paid directly by the entity. They are paid directly by the shareholders. Yet, we suggest, if they will never be paid by the entity, they cannot be considered “savings” for the entity and rolled into an add-on S-premium.

We suggest that the S-premium creates excess value that cannot be supported by the entity’s actual net cash flow. Based on its historical and forecasted fundamentals, the entity will not generate the net cash needed to make this excess value available to the shareholders. The result of our current calculations is overestimation of S value.

So—how do we resolve this dilemma: C income tax is paid at the entity level; S income tax is paid at the shareholder level; yet, we normally value an entity-level benefit stream?

Whether intentional or serendipitous, the Delaware Chancery Court’s ruling in Delaware MRI and Barr’s Modified Delaware MRI Model (MDMM) capture

and resolve it cleanly. But, we encourage the reader to go even further than the MDMM and step outside our current rigid view of who pays corporate income taxes.

We suggest that all taxes on corporate pre-tax income are paid by the shareholders.

Answers to two familiar valuation questions—“Value to whom?” and “Taxation of whom?”—will help us support our assertion.

VALUE TO WHOM? TAXATION OF WHOM?

“Value to whom?” The terms “net cash flow to equity/invested capital” and “value of equity/invested capital” indicate that, whether C or S, the investor is the beneficiary of entity net cash flow and entity value. The investor could be the current owner or the FMV hypothetical buyer and seller. It is never the entity.

“Taxation of whom?” Regardless of entity form and private or public ownership, “Shareholders and investors have been avoiding/minimizing taxes since taxes were invented.10” But, who actually pays the taxes on entity income?

Common sense suggests that, though calculated at different rates under different tax strategies and positions, all income taxes on corporate pre-tax income are paid by the shareholders. Some are paid directly (S individual income taxes). Some are paid indirectly (C corporate income taxes) through the company as the shareholders’ agent. Both direct and indirect income taxes are paid on the entire pre-tax income of the firm and both reduce the net cash flow available to shareholders for their discretionary use, now and in the future.

If the investor/shareholder is the beneficiary of entity value and also the actual payer of entity income taxes, can we not just drop the entire “entity-level/shareholder-level” tax debate and treat the S and C alike with regards to income taxes? We could develop a realistic effective tax rate for the entity and a blended, realistic effective tax rate for the S shareholders. Then we could compare these rates and address the differential, whether in favor of the S or C, using a methodology of choice.

This would provide a great deal of simplicity, clarity, and realism to our S valuation model.

TAX RATES—STATUTORY V. EFFECTIVE

Assumption: Since the complexities of developing realistic effective tax rates for both business entities and individuals are great, it is most conservative and reasonable to use statutory tax rates.

And finally: There is no question that estimating precisely accurate tax rates for both corporations and individuals is difficult or impossible, and statutory rates seem like a simple solution. However, in the real world, individual and corporate taxpayers rarely pay taxes at statutory rates. As a result, our models skew value, often substantially.

HOW CAN WE RESOLVE THIS ISSUE?

Eric Barr suggests we focus on developing reasonably accurate individual income tax rates for application to S pre-tax income. His “with and without” methodology and simple income tax preparation software will achieve this nicely. We can, then, use an after-S-10 Fannon, Nancy J., and Sellers, Keith. (May 26,

2011) “Pass-Through Entity Valuation Update: The Significant Impact of Academic Research on the Debate.” Webinar for Business Valuation Resources. Slides 30-31

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income-tax benefit stream to backsolve for a comparable proxy C effective tax rate and use it in the valuation11.

For a less precise but more direct approach, we can use the average tax rates paid by individuals in various AGI (Adjusted Gross Income) ranges, as provided by a number of respectable online sources. In addition, Damodaran’s website provides an extensive database of average corporate income tax rates for industries and the market as a whole.

Either of these, or a combination of them, is more defensible than using statutory rates.

CONCLUSIONShould there be a premium applied to

the S corporation whose value has been determined relative to the publicly traded C data by which it has been valued? Are the assumptions we use to compare S and C attributes reasonable? Do they make sense? If not, what might we use instead?

We conclude that, when the dynamic and messy facts of the real world of C investing are taken into account, most of the assumptions and attributes we compare and use in S value and S-premium calculation are not sensible or necessary and should be dropped. The useful ones that remain can be approached more effectively, using simplified models and realistic tax rates to generate more defensible results.

The S value premium a benefit? A boondoggle? Given the facts, you decide for yourself.

Sarah von Helfenstein, MBA, CVA, is the founder and CEO of Value Analytics & Design, LLC, in Cambridge, Massachusetts. A more-than-thirty-year veteran of the start-up wars, von Helfenstein has created,

launched, and managed numbers of new initiatives inside/for established enterprises and on a stand-alone basis. For the past twenty years, she has held a variety of roles within the financial valuation sector, and has spent the last ten as a practicing business appraiser. Von Helfenstein has published and presented academic papers on theoretical finance, economics, and real options in the United States and internationally. She has also authored valuation courses and exams, developed valuation curricula and conferences, and edited a number of key valuation books.

11 See Barr, Eric. (2014) Valuing Pass-Through Entities. Hoboken, NJ: John Wiley & Sons, Inc. Chapter 6

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V A L U A T I O N

July/August 2015

In Part One of this series, we discussed how Daubert has in-creasingly replaced Frye as the standard for admitting expert

scientific testimony in trials. As more and more states adopt Daubert, courts increasingly prohibit the admission into evidence of pure opinion tes-timony. Part One highlighted some significant cases in the most recent state to adopt Daubert—Florida—as its standard. In Part Two, we discuss how, once a financial expert develops his/her hypothesis and assertion, that opinion is empirically tested. The guid-ance is provided by the federal courts, in which the Daubert test originated and has been the standard for more than twenty years.

State Farm v. ElectroluxIn State Farm v. Electrolux1, for

example, the Western District of Washington held that the expert exceeded his scope of experience. This

1 State Farm Fire and Casualty Company v. Electrolux North America, 2011 U.S. Dist. LEXIS 148106, 2011 WL 6753140 (W.D. Wash. December 23, 2011)

was a subrogation action concerning a fire that occurred in the home of a couple who held a State Farm homeowner’s insurance policy. State Farm retained an engineer and a fire investigator from a local forensic engineering laboratory, who determined that the fire’s origin was the Electrolux clothes dryer.

State Farm subsequently sent the dryer to a second fire examiner, Sanderson, who examined the dryer, along with Electrolux representatives. Sanderson issued an expert report concluding that: The fire originated in the dryer heater pan and was caused by burning particles of lint; Electrolux defectively manufactured the dryer, which caused lint to accumulate internally; Electrolux defectively designed the dryer because it allowed lint to accumulate where it could be ignited; Electrolux failed to warn because it did not place adequate warnings on the dryer itself, but only placed a warning in the instruction manual; and Electrolux’s expectation that customers would hire qualified service personnel to clean the dryer at eighteen-month intervals, as set forth in the instruction manual, was not reasonable.

In arriving at this last conclusion,

Sanderson and his staff contacted the authorized service providers in question, “posing as a customer wanting to have our dryer cleaned.” Sanderson claimed “few, if any, of them had ever been asked to perform such a service. Some even said they only repaired dryers.”

The defendants moved in limine to preclude Sanderson from testifying regarding some of his conclusions, contending that he was not qualified to opine upon the defendants’ alleged failure to warn or issues relating to consumer expectations. The court granted the motion to the limited extent that Sanderson was prohibited from testifying regarding his “survey” of Electrolux personnel. The State Farm court clarified:

Expert testimony that does not relate to any issue in the case is not relevant and, ergo, not helpful … [I]t is only “reasonable” for an expert to rely on the statements of others if the statements or declarations were collected through methods calculated to elicit reliable information. Here, the court is not convinced that [the expert] collected the statements at issue

By Joryn Jenkins, Esq., and Michael J. Mard, CPA/ABV © Copyright 2015 by authors. Used with permission by The Value Examiner

What the Daubert Test Means to a Financial Expert

•

•

Part Two: Daubert’s Effect on the Federal Courts

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through methods calculated to elicit reliable information.

Apple v. SamsungIn the more recent case of Apple

v. Samsung2, plaintiff Apple moved to exclude testimony of the eight defense experts. Samsung, in turn, moved to exclude testimony of eight of the Apple experts. The Northern District of California found:

An expert witness may provide opinion testimony if: 1) The testimony is based upon sufficient facts or data; 2) the testimony is the product of reliable principles and methods; and 3) the expert has reliably applied the principles and methods to the facts of the case. Under Daubert, “a court should consider 1) whether a theory or technique ‘can be (and has been tested)’; 2) ‘whether the theory or technique has been subjected to peer review and publication’; 3) ‘the known or potential rate of error’; and 4) whether it is generally accepted in the scientific community . . .”

The Apple court found that the underlying consumer survey data on which the defendant’s proffering expert had relied for his calculations was the kind of data on which “experts in the particular field would reasonably rely.” However, the court went on to find that neither the expert nor the defendant had cited any evidence supporting their assertion that the expert’s calculations were based on a generally accepted, peer-reviewed method. And the plaintiff had

2 Apple, Inc. v. Samsung Electronics Co., Ltd., 2012 U.S. Dist. LEXIS 90877 (N.D. Cal. June 29, 2012)

raised serious doubts about the reliability of the expert’s arithmetic, “the flaws of which are apparent even on the face of some of his calculations.”

The court granted in part and denied in part both Apple’s and Samsung’s motions to exclude, thus disallowing some of the testimony from some of the experts on both sides.

Recursion Software, Inc. v. Double-Take Software, Inc.

The plaintiff in Recursion Software, Inc. v. Double-Take Software, Inc.3 sued for breach of contract and copyright infringement of its product, C++ Toolkits. The license agreements were at issue in the case, and contained identical language regarding the distribution of the C++ Toolkits. The parties disputed the scope of the license agreements, specifically, whether the agreements allowed the C++ Toolkits to be distributed by static linking.

The parties each moved to exclude the expert testimony of two of the other party’s experts. The Eastern District of Texas ruled:

In deciding whether to admit or exclude expert testimony, the court should consider … 4) whether the theory or technique is generally accepted in the relevant scientific community.

The court denied the plaintiff ’s motions, finding the expert’s opinions admissible. The court did not see a “profound analytical gap” in one of the expert’s opinions, as asserted by the plaintiff. The court found that both experts’ opinions were sufficiently reliable

3 Recursion Software, Inc. v. Double-Take Software, Inc., 2012 U.S. Dist. LEXIS 63299, 2012 WL 1576252 (E.D. Tex. May 4, 2012)

and admissible. The plaintiff could still challenge the validity of the opinions through cross-examination or by the presentation of contrary evidence at trial.

However, the court granted one of the defendant’s motions, finding that the expert’s testimony was not relevant in helping the jury to determine a fact in issue. Further, the court found that the report was not the product of reliable principles or methods because the expert did not use appropriate comparable license agreements to determine a hypothetical license fee (i.e., the “comps” were not comparable). Because the reliability analysis applied to all aspects of an expert’s testimony, the court granted the motion to exclude.

The court granted in part and denied in part the other defense motion. That expert’s conclusions and opinions provided useful information regarding the context of the parties’ contract negotiations and agreements, but were based in part on interpretations of the contractual agreements and thus were considered legal conclusions. The court excluded the parts of his opinions considered improper legal conclusions. Instead, the court ruled that the plaintiff’s counsel should make such arguments in briefs or argument before the court.

Legendary Art, LLC v. GodardIn Legendary Art, LLC v. Godard4,

the Eastern District of Pennsylvania considered the plaintiff ’s proffer of an expert report and testimony to establish a range of fair-market values in order to prove its damages. The defendants argued that the data upon which the expert

4 Legendary Art, LLC v. Godard, 2012 U.S. Dist. LEXIS 116270, 89 Fed. R. Evid. Serv. (Callaghan) 210, 2012 WL 3549990 (E.D. Pa. August 17, 2012)

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had based his damages calculations was unreliable, rendering his conclusions speculative and inadmissible.

The report relied upon a business plan developed by the plaintiff that contained profit and loss projections for the business. The expert relied upon the plan to form his valuation conclusions and assumed the validity of the plan projections. He only reviewed their reasonableness in light of his experience as a finance professional; in fact, he had no experience in the manufacture, sale, or distribution of artwork or related products. He did not conduct any independent research into the plaintiff ’s industry, and the report referenced no market surveys or studies. There was no evidence that the expert engaged in any independent verification of the projections supplied by the plaintiff.

The Legendary Art court opined that Rule 702 “embodies a trilogy of restrictions on expert testimony: qualification, reliability, and fit.” The court found that the expert’s reliance on projections supplied by the plaintiff, without independent verification, rendered his analysis “unreliable.” The court pointed out that, in ID Sec. Sys. Can., Inc. v. Checkpoint Sys., Inc., 249 F. Supp. 2d 622, 695 (E.D. Pa. 2003), the expert was found to be even more unreliable because he based his opinion on projections supplied by the plaintiff company’s president, who had more incentive than an independent consultant to inflate the predictions of the company’s potential sales and profits. The Legendary Art court therefore excluded the expert’s opinion, holding that:

Unverified profit and loss projections cannot be the type of evidence “reasonably relied upon by experts”

as required by Daubert … Here, the court is faced with the opinion of an expert who has no knowledge of the relevant industry, relied exclusively on the self-serving data provided by Legendary Art, and conducted no independent verification of that data.

Uniloc USA, Inc. v. Microsoft CorporationIn Uniloc USA, Inc. v. Microsoft

Corporation5, the patent at issue involved a system to deter the copying of software. The accused product was a feature offered by the software company to protect several of its software programs. After a full trial, a jury found that the patent was valid, the software company engaged in willful infringement, and the patentee was due $388 million in damages. The district court denied judgment as a matter of law on invalidity, but granted a judgment as a matter of law of non-infringement and of no willfulness, and granted, in the alternative, a new trial on infringement and willfulness.

On review, the court reversed the judgment as a matter of law of noninfringement because it concluded that the jury’s verdict on infringement was supported by substantial evidence. However, willfulness was not supported. The court also reversed the district court’s alternative grant of a new trial on infringement. The court found that the jury’s damages were fundamentally tainted by the use of the twenty-five percent rule of thumb, which it held, as a matter of Federal Circuit law, to be a legally inadequate methodology. Thus, a new trial on damages was warranted.

5 Uniloc USA, Inc. v. Microsoft Corporation, 632 F.3d 1292, 1312 (Fed. Cir. 2011)

The court agreed that the jury verdict of no invalidity was supported by substantial evidence.

The Federal Circuit honed in on the Kumho Tire case and applied the specificity required of an expert to the facts and circumstances immediately before the court:

The specific issue was not whether the visual and tactile inspection methodology was “reasonable in general,” but whether “it was [reasonable to] us[e] such an approach … to draw a conclusion regarding the particular matter to which the expert testimony was directly relevant … The relevant issue was whether the expert could reliably determine the cause of this tire’s separation.”

Baisden v. I’m Ready Productions, Inc.In Baisden v. I’m Ready Productions,

Inc.6, Baisden alleged copyright infringement and several state common law claims regarding two books he had authored, The Maintenance Man and Men Cry in the Dark. Baisden had entered into agreements with IRP, pursuant to which IRP had adapted the two novels into live performance plays. The agreements provided for Baisden to be paid a portion of the ticket and merchandise sales related to the plays. IRP produced and toured the plays and claimed derivative work copyrights on the plays. IRP coproduced video recordings of live-performances of the plays and entered into an agreement to distribute them. IRP neither paid

6 Baisden v. I’m Ready Productions, Inc., 2010 U.S. Dist. LEXIS 45057, 2010 WL 1855963 (S.D. Tex. May 7, 2010)

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Baisden royalties for the sale of video recordings nor provided him with an accounting of those sales.

To assist in calculating damages for infringement of the copyrights, Baisden’s expert consulted “Intellectual Property Damages in the Entertainment Industry” (Litigation Services Handbook 4th Ed.) and Internet Movie Database (Pro Edition), among other entertainment industry data sources. The Southern District of Texas excluded the expert’s testimony concerning the plaintiff’s actual damages to the extent of his opinions on profits from movies, addressing the reliability issue squarely:

Reliability hinges on the sufficiency of the facts or data upon which the opinion is based, the dependability of the principles and methods employed, and the proper application of the principles and methods to the facts of the case. Among the factors to be considered in determining reliability of scientific testimony are: 1) the extent to which the theory can be tested or has been tested; 2) whether the theory has been subject to peer review and publication; 3) potential rate of error for the technique used and the existence of standards and controls; and 4) whether the underlying theory or technique is generally accepted as valid by the relevant scientific community.Because a bulk of the expert’s opinions

were based largely on speculation, the court disallowed them. However, the expert’s testimony on lost profits from the failure to produce The Maintenance Man movies did survive the reliability challenge. While the defendant’s argument that the expert lacked important evidence and

that he employed an improper method for calculating actual damages under the Copyright Act did raise concern, it did not warrant exclusion of his testimony. Instead, these facts, if proven at trial, were fodder for cross-examination and went to the weight of the expert’s testimony.

CONCLUSIONThe twenty-two-year history of federal

cases reveals simplicity and precision for the financial expert and the client’s lawyers: The reliability of the financial expert’s opinion must be a function of specific relevance particular to the facts and circumstances forming the testimony. Square pegs go into square holes. Evidence of reliability of the expert’s methods can originate from testability, being peer-reviewed (and presumably accepted), establishment of an error rate (from some testing mechanism including standards and controls), and/or establishing that the methodology is generally accepted (e.g., Generally Accepted Accounting Principles). The measurement of error rates has a threshold function of materiality because immaterial information does not affect a user’s decision.

The nature of finance creates a two-pronged level of testability and potential error rates that must be minimized to comply with the Daubert test. The first is at the quantitative level of judgment, in which quantitative error rates should be tested (and corrected, if necessary) and evidenced by the appropriate completion of checklists specific to the purpose and utilized in both non-litigation and litigation settings. For instance, quantitative error rates can be tested in a valuation engagement at several levels. Typically, in such an engagement, the expert will first input

five years of financial statements to perform a financial analysis. After the initial input, another analyst should trace the results back to the source data to verify that the input was performed correctly. Errors are, of course, corrected. Thus, the final result of this phase for the report should have no error rate.

A next level of input might be the peer ratios (RMA or comps) and then the analyst’s interpretation of the subject’s performance to the peer ratios. Finally, the value driver methodology (market guideline data, income projections for a DCF, market value data for an asset-based approach, etc.) is input, reviewed, changed, and, upon final acceptance, traced from the underlying inputs (10Ks, strategic plans, real estate appraisals) to the subject’s report narrative. Again, errors normal and are routinely corrected. There is an error rate, but the final product in the report should be error-free and include documentation established at each level of work by appropriate sign-off of the firm’s checklist. That is, the integrity of the source data from input to manipulation to report has now been double-checked, and the valuator’s quantitative input to the subject’s report is error-free.

The qualitative level of judgment is the second level of testability, and potential error rates in quality of judgments must also be minimized. The monitoring at the qualitative level is an entity-specific consideration and thus an aspect of relevance. Materiality is a pervasive constraint to the expert’s testimony because it is pertinent to all of the qualitative characteristics underlying the expert’s opinion. Such extensiveness of judgment should be well-documented.

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There are hundreds of judgments throughout the valuation process, but typically only a few that have a material impact on any one conclusion. Certainly, the qualitative interpretation of the subject’s performance compared to its selected peers requires elaboration. In what manner are the peers comparable (size, industry, geographic area)? Does the subject perform better or worse than the selected peers? Why (market share, more efficiencies)? Qualitative aspects extend to the professional judgment necessary for interpreting the economic behavior of the subject and matching such behavior to the performance of the guidelines, directly via public markets or indirectly via rates of return.

It is axiomatic that value is a function of economics and always based on the return on assets. The asset-based approach represents the subject’s things, owned or borrowed. The income approach quantifies the return these assets can be expected to produce.

The market approach, while critical if available, merely reflects the market’s perceptions of the subject’s usage of its things, owned or borrowed, and their expected returns.

Though every engagement is different, every engagement always has some economic linchpin. The due diligence and the paper trail should make clear the analysis, support, rationale, and ultimate qualitative derivations. It is this trail laid by the analyst and aligned within the generally accepted methodologies that is then reviewed and adjusted by the in-charge principal and cold-reviewed by another principal.

Pursuant to the Daubert test, these generally accepted methodologies are your (CPA) peer-reviewed ethics, principles, and standards and also include peer-reviewed protocols such as practice aids, courses, books, and articles. Evidence for Daubert compliance of the qualitative aspects is documented by the appropriate sign-offs on the firm’s

checklists. The measurable error rate is established over time by the number of such assignments that have failed to be accepted by the users of the firm’s opinions and reports. Financial experts are quirky beasts who use peculiar methods not commonly known to non-financial courts. Understanding and observing the methods at both quantitative and qualitative levels of judgment above the threshold of materiality evidenced by broadly applied checklists can go a long way toward bridging the gap. Leaving a clear trail of documentation in the work papers and checklists can demonstrate compliance with the Daubert test:

• Peer-reviewed methodology • Error rate established • Tested empirically • Accepted generally in the

expert’s industry • Litigation and non-litigation use of

methodology is established

Joryn Jenkins, Esq., is an attorney in private practice in Tampa, Florida, with the firm of Open Palm Law, where she concentrates her practice in the areas of appellate, bankruptcy, commercial,

domestic, and legal malpractice litigation. She also is the author of Florida Civil Practice Motions (Lexis Law Publishing, 2nd ed. 1997) in addition to numerous

other books, articles, and journals. She can be reached at www.OpenPalmLaw.com.

Michael J. Mard, CPA/ABV, has been a full-time business appraiser and expert witness for thirty years with a broad range of experience. He has provided expert testimony more than 325 times, in

depositions and trials, in both federal and state courts, related to intangible assets, intellectual property, business damages, marital dissolution, shareholder disputes, and IRS matters. Michael is a Florida CPA and has been elected into the AICPA Business Valuation Hall of Fame. He can be reached at www.FVGFL.com.

CareerHow Do I Move Forward with My New Specialty?

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— I n t r o d u c i n g —

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SpecializationI Need Specialized Education.

— I n t r o d u c i n g —

PRACTICE SUPPORT HEADQUARTERSBrought to you by the National Association of Cer tif ied Valuators and Analysts™

NACVA's Practice Support Headquarters (PSH) is a place where members of the National Association of Certified Valuators and Analysts™ (NACVA®) can find answers and solutions to their questions and challenges. The PSH portal points to well-refined programs and services that we have offered for many years. What is special about this portal is it is designed to help our members narrow in on solutions quickly, as we have organized the navigation of this site, along with our program and service solutions, based on general areas of need.

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24



Business owners have many options available to them with regard to form of ownership, from C Corporation to various

forms of flow-through entity (FTE). FTE ownership is common for service-related businesses and increasingly more popular for capital intensive businesses. The form of ownership incorporates a combination of state law entity attributes and federal income tax treatment. As a valuation analyst and/or forensic accountant, it is essential to understand the differences among these entities and how to read and interpret the tax reporting mechanism provided to the owners of these entities, including Schedule(s) K-1. Often, the only financial information available to the analyst is the entity tax return and Schedules K-1. This article will briefly describe the different forms of business ownership and highlight federal tax differences (a complete analysis is beyond the scope of this article) and provide information with respect to Schedule K-1 that may be important to the valuation analyst and forensic accountant.

TAX ENTITIESWhile different types of ownership

are available for state law purposes (e.g., corporations, professional corporations, limited liability companies), such entities are broadly classified as corporations, partnerships, or trusts for federal income tax purposes. Other forms of ownership may be disregarded entities for federal income tax purposes (e.g., sole proprietorships, branches or divisions) and, as such, provide no separate tax reporting. Sole proprietors report their business operations on Schedule C included in the owner’s individual income tax return. It should be noted that sole proprietorships do not include a balance sheet in their tax reporting; other tax entities such as corporations and partnerships may be required to include a balance sheet [Schedule L] in their tax returns, depending on the amount of total assets and total receipts. Branch or division business operations are combined with the owner entity business operations and reflected in such owner entity’s tax return.

An entity formed under a state incorporation law is classified as a

corporation for federal income tax purposes. It will be taxed as a C corporation unless an election is made pursuant to Subchapter S of the Internal Revenue Code. C corporations, or “hard” corporations, are taxed under an entity theory of taxation —they are considered separate taxable entities—and report their operations on Federal form 1120. C corporations pay an entity-level tax on its net taxable income. Shareholders of C corporations receive income with respect to their investment in the entity via distributions. Distributions are taxable as dividends to the extent that the entity has “earnings and profits” as defined in the Internal Revenue Code (an amount somewhat akin to tax basis retained earnings). It should be noted that many closely held C corporations “manage” taxable income and, consequently, earnings and profits, through shareholder/officer compensation, above market rents paid on shareholder/officer owned realty, and various perquisites and other discretionary expenditures to the extent that such entities result in being taxed similar to S corporations – no corporate income tax and only shareholder-level taxes. This strategy is impacted by the marginal tax

This column serves as a refresher on some of the basics of valuation. It will feature information from practitioners, lecturers, and educators from within the NACVA community.

Forensic Comparison of Various Forms of Ownership

E D U C A T I O N : B A C K T O B A S I C S

•By John T. Alfonsi, CPA/ABV, CFF, CFE, CVA, MST, and Walter M. McGrail, JD, CPA

25



rates of the entity and the shareholder(s) but is one for which the valuation analyst must be aware when using a cash flow based valuation method as failure to make proper identification and adjustment, when necessary, for such items will result in an incorrect valuation result.

S corporations are generally state law corporations that make an election to have the shareholders report the business income in their individual income tax income tax returns. This avoids the double tax issue with C corporations (tax at the corporate level and tax at the shareholder level when earnings are distributed) as distributions of taxable income by the S corporation are generally tax-free. As such, S corporations are considered flow through entities (FTE). Like all FTEs, S corporation shareholders report their share of the income or loss on their individual returns whether or not the entity distributes any cash or property. S corporations file an information return, Federal form 1120S, and provide the shareholders with a Schedule K-1. The return may reflect an entity-level tax if, for instance, the entity was formerly a C corporation that converted to S corporation status and recognized some or all of its “built-in gain” during the recognition period (a discussion of the built-in gain rules is beyond the scope of this article).

Partnerships may take the form of general partnerships or limited partnerships for state law purposes. Partnerships require at least two owners and are taxed as FTEs – the partners report their share of the income or loss on their returns whether or not the entity distributes any cash or property and distributions are generally tax-free. Partnerships file an information return,

Form 1065, and provide the partners with a Schedule K-1.

Limited liability companies (LLCs) are state law entities that, like corporations, provide limited liability of the members with respect to the debts and obligations of the company. LLCs with two or more members have a default classification as a partnership for federal tax purposes. As a partnership, they file an information return, Form 1065, and provide the partners with a Schedule K-1. An LLC with only one member is a disregarded entity for tax purposes and is treated as a sole proprietorship, if owned by an individual, or a branch/division if owned by a business entity. An LLC may elect to be taxed as a corporation for federal income tax purposes (“check the box”) and, as such, may be eligible to make an S corporation election. If the “check the box” election is made, federal tax reporting is dictated by whether the entity is a C corporation (Form 1120) or an S corporation (Form 1120S).

OWNER REPORTINGAs a C corporation is a taxable

entity, there is no separate reporting to the shareholders reflecting their share of business earnings. Distributions to shareholders are reported on Form 1099-DIV issued to the recipient shareholder; if the C corporation does not make any distributions, there is no required filing of Form 1099-DIV. Further, if none of the distributions on the 1099-DIV are taxable as a dividend, there may be no record of ownership of the entity reflected in the shareholder’s tax return. The shareholder may receive compensation from the C corporation if they are otherwise providing services but a W-2 does not provide evidence of ownership. This is

important when determining income available to the owner (e.g., spousal or child support)—if the C corporation is earning income but neither pays it to the owner/employee as compensation nor distributes it to the owner as a dividend, there is no record of that income in the owner’s tax return. The analyst is left with trying to obtain the corporate tax returns and other corporate documents to ascertain the ownership interest, including percentage ownership and nature of interest held (common, preferred, etc.), as well as income that was earned by the entity and otherwise available but not paid or distributed to the owner(s).

As a FTE, S corporations provide more transparency than C corporations. S corporation shareholders are provided a Schedule K-1 annually that reports their share of business tax earnings (loss). It also discloses percentage ownership. The percentage ownership reflects the effective ownership for the year rather than ownership as of the end of the year.

Accordingly, the analyst/accountant will not be able to determine if there was a change of ownership during the year merely by looking at the current year K-1; he/she will be required to compare the disclosed ownership percentages from the prior years’ K-1s, if available.

ExampleX is a shareholder of ABC, Inc., an S corporation. At the beginning of the year, X owned 100 of the 500 shares issued and outstanding or twenty percent. The K-1 for the year reflects an ownership percentage of fifteen percent. Possible reasons are (i) the issuance of additional shares during the year (e.g., ABC

26



issued 500 additional shares to shareholders other than X effective July 1) or (ii) a transfer of shares by X (e.g., X sold fifty shares) effective July 1. Under either scenario, X’s ownership at the end of the year would be ten percent and his effective ownership for the year would be less than twenty percent but greater than ten percent.

Partnerships provide even more transparency because of the application of the aggregate theory of taxation to these entities. Like S corporations, they provide their owners with a Schedule K-1 annually but, unlike S corporations, the K-1 provides significantly more information. For example, a partnership Schedule K-1 reflects ownership of capital as well as share of profits and losses as of the beginning and end of the year. Profit and loss sharing ratios may reflect effective ownership for the year, like an S corporation Schedule K-1, but capital percentages are generally based on actual ownership as of the applicable dates. As partnerships are required to liquidate in accordance with capital accounts, capital percentages may provide the percentage of liquidating distributions to which the partner will be entitled.

FINANCIAL INFORMATION ON SCHEDULE K-1SIncome

For FTEs, an owner’s share of the income or loss from the entity flows through to the owner’s tax return; for individual owners, it is reported on Schedule E of Form 1040. But “income” is not always “income” for purposes of the analyst. Line 1, Ordinary Income,

and Line 2, Rental Real Estate, reflect tax accounting income. It is not synonymous with economic income. Taxable income typically reflects adjustments made to financial statement or book income to comport with federal income tax rules; these differences, if any, may be found by looking at Schedule M-1 or M-3, if applicable, of the FTE’s tax return, which provides a reconciliation of book income to taxable income. The goal of financial accounting and its rules is to present information to external parties, such as investors and creditors, to make sound economic decisions. The goal of tax accounting and its unique rules is to provide a basis for the generation of revenues by federal, state, and local governments. For example, unrealized gains of marketable securities are typically included in financial accounting records but are not included in taxable income. As such, taxable income does not reflect economic income.

It is common knowledge for valuation analysts that taxable income is also not synonymous with cash flow. This concept, however, often requires explanation to the attorneys and other non-accountants. Such persons need to understand that typical differences are non-cash expenses such as depreciation and amortization which are deducted in arriving at taxable income but do not represent cash charges. Further, tax depreciation is based on the concept of cost recovery, a means to deduct the cost of capital expenditures, and may not be indicative of a reduction in value more akin to economic income determinations. Adding back depreciation and amortization results in a proxy for cash flow from operations (e.g., earnings

before interest, taxes, depreciation and amortization, or EBITDA) but may not be reflective of cash flow available to the owner(s). Common adjustments include deductions for capital expenditures, increases for debt borrowings, deductions for debt repayments, and increases or decreases for working capital needs. These can be ascertained by looking at Schedule L (balance sheet) of the FTE tax return.

Similarly, attorneys need to understand that often, the FTE does not distribute its earnings to its owners but, rather, reinvests the income in the business (e.g., capital expenditures, additional inventory, repay debt). When this occurs, Schedule K-1 income does not reflect income or cash flow currently available to the owner; if the business is reinvesting its earnings that may be indicative of a growing business with a greater potential for income / distributions in the future

DISTRIBUTIONSDistributions are reflected in the

capital account analysis of partnerships and as a separately stated item on Schedule K-1 for S corporations. These distributions may represent cash or property distributed to the owner; if it is property, it is generally reflected at the property’s fair-market value at the time of distribution rather than its adjusted tax basis.

Whether an FTE is required to make distributions is a function of its operating agreement or bylaws; often distributions are discretionary. It is common for these agreements to allow the general partner, managing member, or president/CEO to hold back cash for operations. Generally, closely held companies do not stock-

27



pile cash. As such, the analyst should be aware of earnings from operations with no distributions and increasing cash balances (refer to Schedule L of the entity’s tax return). This should cause the analyst to inquire as to the reason of keeping cash on hand, especially if there is a historical pattern of distributing excess cash. Like the C corporation, which does not distribute its earnings, this could reflect income (cash flow) otherwise available to the owner, or future cash flow requirements (i.e., deferred maintenance, capital expenditures, non-recurring expenses) that are not otherwise apparent from analyzing the income tax returns.

Distributions may reflect nothing more than amounts necessary for the owners to pay the tax liability associated with the FTE earnings. As FTEs, the owners report their share of the entity’s earnings and are responsible for paying taxes on such share. If the entity distributes cash sufficient for the owners to pay such taxes, the entity is operating on a cash-neutral after-tax basis, as compared to a comparable C corporation (absent the difference between owner and C corporation tax rates).

ExampleABC, LLC, is a partnership for tax purposes owned equally by three individuals. The operating agreement provides that all distributions are discretionary, except that the LLC must make distributions at least annually in an amount equal to the highest marginal individual federal income tax rate multiplied by taxable income. Assuming ABC generates one million dollars of taxable income in a year when the highest

marginal individual income tax rate is 39.6 percent, ABC is required to distribute $396,000 to the owners or $132,000 each.

The analyst needs to consider, then, what amounts represent income available to such owner—$333,333 of taxable income, $132,000 of cash distributions, $201,333 of after-tax taxable income, or some other amount. The valuation analyst should be aware of relevant case law regarding the issue as well as the guidance and position of the IRS as reflected in “Valuation of Non-Controlling Interests in Business Entities Electing To Be Treated As S Corporations For Federal Tax Purposes: A Job Aid For IRS Valuation Analysts.”

COMPENSATION FOR SERVICESC corporations, S corporations and

partnerships each present unique tax planning considerations with respect to owner compensation. As a separate taxable entity, a C corporation may have an incentive to pay out its earnings via bonuses or compensation to its owners; these mitigate or eliminate the potential for double taxation of the corporate earnings. C corporations report compensation paid to owners on Form W-2. The analyst needs to be cognizant of fiscal-year C corporations —the financial and tax reporting for the entity will reflect owner compensation on a fiscal-year basis whereas the Form W-2 reflects owner compensation on a calendar year basis. It is possible that the owners may be able to reflect lower income than usual by accruing a bonus in the fiscal year but having it paid in the next calendar year. Tax accounting rules

may defer the deduction for tax purposes, however (e.g., IRC §§267 and 404).

ExampleXYZ, Inc. is a fiscal-year taxpayer with a September 30 year-end. It accrues a bonus to one of its owners for its fiscal year ending September 30, 2014, but does not pay it to the owner until January 15, 2015. The owner’s Form W-2 for 2014, will not reflect the accrued bonus. Further, the accrued bonus would not be properly deductible in the tax return for the fiscal year ending September 30, 2014 as it was paid more than 2 ½ months after the close of the fiscal year (see IRC §404). However, the bonus would be accrued for GAAP financial reporting purposes.

S corporations have an incentive to minimize owner compensation and maximize distributions. Under current income tax rules, an S corporation shareholder’s share of income is not subject to self-employment tax, whereas compensation is subject to normal payroll taxes including the unlimited Medicare portion of the FICA tax. Like C corporations, S corporations report compensation paid to their owners on Form W-2. Accordingly, distributions that are, in effect compensation, should be considered income to the owner by the analyst.

Partners are considered self-employed for federal tax purposes and, as such do not receive a Form W-2. Instead, they may receive guaranteed payments that are reported on the Schedule K-1 provided to the partner and reflected as self-employment earnings. A partner’s

28



distributive share of partnership income may also be subject to self-employment tax.

• General partners–guaranteed payments and distributive share of ordinary income treated as self-employment income

• Limited partners–guaranteed payments only treated as self-employment income

• LLC members–generally based on whether they act in a capacity similar to a general partner or a limited partner.

CAPITAL ACCOUNTSS corporations generally do not

reflect or report the shareholder’s share of equity; they may provide information, however, with respect to tax basis.

Partnerships, including LLCs taxable as partnerships, on the other hand, generally report individual capital accounts for their owners. A partnership capital account reflects the partner’s share of the equity in the entity’s assets (assets– liabilities = equity). Generally, the capital account does not necessarily reflect the fair market value of the equity but is based on some form of internal accounting – financial statement (GAAP) basis, income tax basis, §704(b) book accounting basis –which will be disclosed at the bottom of the capital account reconciliation on Schedule K-1. In certain instances the capital account will reflects fair-market value where industry standards provide that book income, whether GAAP or §704(b), reflect the revaluation of assets at their fair market value (e.g., hedge funds, venture capital funds, private equity funds, other investment entities). An indication of such would be found in the reconciliation of taxable income reported on the K-1 to capital account income reflected in the capital account

analysis for items such as “revaluation of partnership assets” or “unrealized gain”. Further, capital accounts do not reflect unrecorded assets (e.g. , goodwill or going concern), a further indication that it may not be indicative of fair-market value.

Capital accounts are similar to retained earnings in that they represent a partner or member’s share of the equity of the entity. As noted, capital accounts may be maintained on various accounting bases, including tax basis, §704(b) book basis, and GAAP basis. Capital accounts that are not revalued, therefore, reflect original capital contributions (on whatever basis the partnership maintains its capital accounts) plus undistributed income/profits. As partnerships are required to liquidate in accordance with §704(b) capital accounts, a capital account may represent a minimum amount of future distributions, assuming the assets have not decreased in value.

CAPITAL CONTRIBUTIONSCapital contributions generally

represent acquisitions of additional shares, units, or membership interests in the entity. C corporations and S corporations have no shareholder reporting mechanism reflecting such contributions. Capital contributions to S corporations may, however, be reflected in an increased ownership percentage (see Owner Reporting, on page 25) or may be reflected as additional tax basis if a tax basis schedule is provided to the shareholder.

Partners’/members’ capital contribu-tions will be reflected in the capital ac-count reconciliation on Schedule K-1 and will represent additional money or prop-erty contributed to the entity. For property contributions, the amount reported is based on how the entity maintains capital

accounts–fair market value if on a §704(b) basis, or adjusted tax basis if on a tax basis.

The terms of an entity’s operating agreement may require an owner to make future capital contributions. For example, venture capital and private equity funds are often structured as committed capital funds where the investor agrees to contribute a certain amount of money. The funds are typically called by the fund as investments are identified; this may take years. Any unfunded commitment represents a liability of the investor which should be considered in determining the owner’s net worth.

ENTITY LIABILITIESA corporation (C or S) shareholder

generally has no obligation with respect to the repayment of the entity’s liabilities unless the shareholder has guaranteed the indebtedness or otherwise indemnifies the entity against loss with respect to the indebtedness. Again, there is no owner-reporting mechanism that discloses a C or S corporation shareholder’s guarantee of any entity indebtedness. Further, S corporation shareholders generally do not get tax basis for the guarantee of the entity’s indebtedness, unless the debt is payable to the shareholder. Accordingly, any such guarantee would not be reflected in the shareholder’s tax basis schedules.

A partner’s tax basis in a partnership represents his share of the partnership’s tax basis in its net assets and, as such, includes the partner’s share of the entity’s liabilities. The partnership is required, therefore, to report the partner’s share of liabilities. These liabilities are disclosed on Schedule K-1 and are categorized as nonrecourse or recourse. For purposes of partnership taxation, a recourse liability is a liability for which the partner bears the economic risk of loss. A nonrecourse

Continued on page 34

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the value examiner

•

•

July/August 2015

EFFECTIVE COMMUNICATION

By Michael Gregory, CVA, ASA, Qualified Mediator

Tips for Practitioners

In any venture, it is vital to always keep the lines of communication open. This is an axiom that should be practiced in all types

of relationships, from international diplomacy to kids playing a game of softball. In business, not only is it important that your clients know there is always a way to resolve a conflict, but that you are the “go-to” person in terms of conflict resolution. Human contact—and common sense—are the two best ways to diffuse conflict and come to a workable solution. This month’s column deals with some tips that can help you keep the communication flowing.

EFFECTIVE, TWO-WAY COMMUNICATION

Effective, two-way communication requires interactive listening. You need to listen intentionally to understand what someone is saying, enjoy someone else’s point of view, learn something, or give help and comfort. The key is wanting to listen. When listening to someone else, take mental notes and, before responding to what you’ve heard, summarize it with the intention of synopsizing it better than the person presented it to you. This demonstrates active listening.

Another technique is to have

conversations with results. These types of conversations have roughly five stages:

1. What’s up? (This is where you can get the areas of concern on the table.)

2. What’s so? (This stage allows all parties to gather information after discussing the issue first.)

3. What’s possible? (Jointly agree on a plan, goal, and options to develop a game plan for additional material, interviews, or other steps.)

4. Let’s go! (This is the point where all parties make arrangements and joint commitments.)

5. How’d it go? (Time to evaluate and celebrate success. It is also the time to assess the lessons you learned for the future and to evaluate the impacts.)

BARRIERS TO LISTENINGWhile it is important to be an effective

listener, it is also important to realize there are many barriers to listening. You need to ensure you set up an environment with the appropriate parties to have a conversation, therefore, be sure you are dealing with the individual or individuals who have the issue. Whenever possible, try to avoid “interested third parties.” Always deal directly with the person or

persons who have lodged the complaint. Next, practice active listening by letting the person with the grievance (PWTG) describe their situation or complaint. Make mental notes and ask questions to be sure you understand the problem. Avoid offering any solutions until you have completely understood the dilemma and, most important, the PWTG feels they have had a fair hearing.

ExampleTo improve your active listening

skills, try this with someone else for five minutes, then ask him to reverse roles with you:

• Ask a friend or colleague to recount a moment when he felt he had achieved something important.

• Let him speak for about three minutes. • Without offering solutions, repeat

the highlights of what he or she said. • Conclude by asking, “Is this correct?”

Interact appropriately to make sure you understand.

• Ask additional inquisitive questions demonstrating listening, but again, do not offer solutions.

• Reverse roles. • Now, take turns discussing how each

of you was “heard.”The book, Men Are from Mars, Women


31the value examiner July/August 2015

Are from Venus1, helps bring home some similar points. I am no expert on family, but after thirty-plus years of marriage, I can tell you that listening is everything it is cracked up to be. Listening is a skill that needs to be practiced for effective communication. It doesn’t just happen for many people in the field unless they are trained to do it and coached into doing it well.

FOLLOW UPExtrodinary leaders are ones who:

1. Listen to their customers2. Are there for all of the stakeholders,

1 John Grey, PhD, Men Are from Mars, Women Are from Venus:A Practical Guide for Improving Communication and Getting What You Want in Your Relationships: (New York: Harper Collins, 1993)

including the other party and their team members

3. Make reasonable decisions in minimal time

4. Serve their peers well

To become a truly effective leader in your field, it is vital that you evaluate yourself on your soft skills (interpersonal skills). Become aware of what has worked in the past, what lessons you have learned and, most important, what you have been able to apply to your day-to-day interactions. There is always room for improvement. You should ask yourself after every encounter, What could I do to improve in the future? What do we all need to do differently now, so that we remember what to do differently next time?

Take the time to invest in relationships with others, including those you disagree with. Don’t be afraid to let go of sunk costs—let the issue go when appropriate —because it’s okay.

Michael Gregory is a CVA, an ASA, and a Qualified Mediator with the Minnesota Supreme Court. Mike is the

founder of Michael Gregory Consulting, LLC, and now Michael Gregory Institute — Tax Topics and Leadership Topics. He is the author of nine books and fourteen videos that may be viewed at www.mikegreg.com. Mike also mediates and conducts valuation reviews. E-mail: [email protected].

VE

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32 the value examinerJuly/August 2015


By Peter Agrapides, MBA, CVA

Court Corner•

•L I T I G A T I O N C O N S U L T I N G

BUSINESS VALUATION

Brennan v. Brennan Associates2015 Conn. LEXIS 135; May 5, 2015Supreme Court of Connecticut, Judge Zarella

At trial, the plaintiff, Thomas Brennan, argued that his interest in the other partners should be valued and bought out by the partnership. The trial court awarded the plaintiff approximately $6.9 million, his interest in the partnership, as well as $3.5 million in interest on that award. The remaining partners, and the co-administrators of the estate of the deceased partner, appealed the judgement of the trial court.

The appeals court ruled: [1]-The trial court erred in valuing plaintiff ’s dissociated partner’s interest in the partnership as of the date the court rendered the judgment of dissociation, rather than on the date that judgment was affirmed on appeal, because until then, the judgment had been automatically stayed under Conn. Gen. Prac. Book, R. Super. Ct. § 61-11(a), and the “date of dissociation” for the purpose of valuing the partner-ship under Conn. Gen. Stat. § 34-362 was the date plaintiff was actually expelled, not the date the judgment of dissociation was rendered; [2]-The trial court erred in awarding plaintiff interest on his buyout award from the date of dissociation; as a wrongfully dissociated partner, he was entitled to interest under § 34-362(h) only once each of the scheduled payments to him became due. The Supreme Court of Connecticut reversed the judgment of the lower court.

MERGER LITIGATION

Merlin Partners LP v. AutoInfo, Inc.2015 Del. Ch. LEXIS 28; April 30, 2015Court of Chancery of Delaware, Judge Noble

The decision by Judge Noble in this case illustrates impor-tant lessons for companies, directors, and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell a company at an inadequate price.

AutoInfo, Inc. was a small transportation services com-

pany that provided nationwide brokerage and contract carrier services through a network of potential independent agents. Its board retained Stephens Inc., an investment bank with ex-pertise in the transportation industry, to serve as its financial advisor. The board was also shopping the company to potential purchasers. AutoInfo, at Stephens’ instruction, prepared an aggressively optimistic five-year financial forecast.

Two of AutoInfo’s shareholders petitioned for an appraisal of their shares pursuant to 8 Del. Code Ann. tit. 8, § 262. The petitioner’s expert witness valued the company at $2.60 per share based on a discounted cash-flow analysis using man-agement-prepared projections and two companies’ analyses. AutoInfo’s expert valued the company at $.0967 per share based on the $1.05 merger price and after deductions for certain merger-related savings.

The court ultimately agreed with AutoInfo’s expert for the following reasons: [1]-In a Del. Code Ann. tit. 8, § 262 appraisal proceeding, a discounted cash-flow analysis was not entitled to any weight because management’s projections had been exces-sively optimistic and unreliable; [2]-Because the weight of the evidence suggested that size and business model affected the multiples at which companies traded in the freight brokerage industry, comparable companies analyses that failed to control for these differences were not reliable indicators of value; [3]-The merger price was the best indicator of share value because the merger was negotiated at arm’s length, without compulsion, without self-interest or disloyalty, with adequate information, with competition among many potential acquirers, and with a generally strong sales process that could be expected to have led to a merger price indicative of fair-value.

MARITAL PROPERTY

Marter v. Marter2015 Miss. App. LEXIS 257; May 12, 2015Court of Appeals of Mississippi, Judge Fair

Gary and Celeste Marter were granted an irreconcilable-



differences divorce in 2010. They could not agree on a divi-sion of the marital estate, so they submitted that issue to the chancery court for resolution. Unhappy with the result, Gary Marter appealed. The appellate court ruled that the chancel-lor’s observation did not demonstrate a defect in his reasoning, citing that the chancellor expressly noted that there was timber on the property, but he treated it as a fixture of the land. The appellate court said the chancellor did not assign it a separate value, and the husband offered no authority requiring land and timber to be valued separately. Finally, the appellate court ruled the chancellor did the best he could with the evidence presented to him, and his findings were not clearly erroneous. The appellate court affirmed the ruling of the lower court.

TAXES

Costello v. CommissionerT.C. Memo 2015-87; May 6, 2015United States Tax Court, Judge Lauber

The petitioners, Barbara and David Costello, owned a large farm in Howard County, Maryland. In 2006, they granted a land preservation easement on this property to the county. By granting this easement, the petitioners became entitled, as part of a “density exchange,” to sell to a developer the development rights pertaining to their parcel. The developer paid them $2.56 million for these rights.

On their federal income tax return for 2006, the petitioners reported a noncash charitable contribution of $5,543,309 on account of the easement. Because they could not fully utilize this deduction for 2006, they also claimed carryover deductions for 2007 and 2008. The Internal Revenue Service disallowed these deductions.

The court ruled as follows: [1]-The record supported the Commissioner of Internal Revenue’s decision disallowing chari-table contribution deductions taxpayers claimed under I.R.C. § 170 for a conservation easement they granted to Howard County, Maryland, on a farm they owned, and imposing ad-ditional tax, and accuracy-related penalties; [2]-The taxpayers were not entitled to claim a charitable contribution deduction for the easement they granted to Howard County because they conveyed the easement as part of a quid pro quo exchange, receiving payment for transferring development rights to a third party. They were also precluded under I.R.C. § 6664(c)(3)(A) from relying on the “reasonable cause” defense to avoid accuracy-related penalties under I.R.C. § 6662 because they did not submit a “qualified appraisal” with the first return in

which they claimed the deduction. The court stated it would uphold the Commissioner’s decision and impose additional tax and accuracy-related penalties.

Davis v. CommissionerT.C. Memo 2015-88; May 6, 2015United States Tax Court, Judge Paris

Bob Davis, an experienced real estate investor in Waco, Texas, assembled contiguous properties to develop into residen-tial, multi-family, and commercial use. A charitable foundation approached Mr. Davis about donating the property for the de-velopment of a senior-living facility. The foundation informed Mr. Davis it could not pay more than two million dollrs for the property. Mr. Davis agreed to make the donation in return for the wo million dollars, provided the appraised value of the property was $4.1 million, or higher. The property was appraised at $4.1 million. The IRS rejected the charitable deduction, stating Mr. Davis lacked charitable intent.

The court ruled: [1]-When taxpayers claimed a charitable contribution under 26 U.S.C.S. § 170(a)(1) of $2.1 million on a bargain sale of undeveloped land for wo million dollars al-leging a fair-market value of $4.1 million on the date of sale, the court found that taxpayer husband, i.e., Bob Davis, had a charitable intent at the time of the sale, as he believed in the donee’s mission and activities; [2]-The fact that taxpayer investigated the tax benefits on a bargain sale and was moti-vated in part to obtain a deduction for the maximum amount possible did not mean charitable intent was lacking; [3]-Nor did it matter that the consideration he received exceeded his basis; [4]-Although the court found the taxpayers’ expert to be more persuasive with respect to fair-market value, it found that a fifteen percent negative adjustment had to be made to reflect the sanctuary derived from flood-zone restrictions. The court ruled in favor of the taxpayers in part.

Hughes v. CommissionerT.C. Memo 2015-89; May 11, 2015United States Tax Court, Judge Wherry

Ian Hughes, the petitioner, filed an amended tax return on February 4, 2015, for tax year 2001. The IRS, the respondent, determined a federal income tax deficiency of $364,006 for that year’s return. The IRS also (1) determined a $36,400.60 sec-tion 6651(a)(1)2 addition to tax for falue to file the original tax return in a timely manner, (2) determined an accuracy-related penalty under section 6662(a) of $147,286, and (3) asserted

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in his amendment to answer filed February 26, 2014, a sec-tion 6662(a), (b)(3), (e), and (h) gross valuation misstatement penalty. Before trial, the parties settled with regard to all but one of the non-computational adjustments that contributed to the determined deficiency (settled issues). The parties litigated that remaining adjustment at trial. The parties also settled the late-filing addition and agreed on the accuracy-related penalty applicable to the portion of petitioners’ underpay-ment attributable to one of the settled issues. The remaining penalties were litigated.

The court ruled: [1]-Referencing I.R.C. § 1015(a), the court concluded that even had petitioner husband made completed gifts of an undivided legal and beneficial interest in the founders’ shares and the K-1 shares to petitioner wife, she would have zero bases in those shares. Referencing I.R.C. §§ 61, 102(a), the court concluded that under the Internal Revenue Code, the gifts were not taxable events for income tax purposes; [2]-Re-gardless of which of the petitioners owned the shares of the newly formed corporation when they were sold, that person had zero bases in the shares; [3]-Among other matters, the court determined that for both blocks of shares of the newly formed corporation, petitioners’ aggregate basis, as reported

on their amended return, exceeded the correct value by 400 percent or more and was a gross valuation misstatement. The court held up the determination of a deficiency as to petitioners’ gain on disposition of shares of the newly formed corporation as reported on their amended return. Among other things, it held up the determination of a forty percent gross valuation misstatement penalty as to petitioners’ overstatement of their bases in said shares on their amended 2001 return. Decision was entered under U.S. Tax Ct. R. 155.

Peter H. Agrapides, MBA, CVA, is a prin-cipal with Western Valuation Advisors, where his practice focuses primarily on valuation for gift and estate tax reporting and buy-sell engagements. These engagements have ranged from the valuation of small family-owned businesses to companies with over one billion dollars in revenue. Mr. Agrapides served on

NACVA’s Valuation Credentialing Board in 2010, and he is a member of the Current Update in Valuations instructor team. E-mail: [email protected]

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liability is a liability for which no partner bears the economic risk of loss. “Economic risk of loss” is determined by using a worst-case scenario approach, whereby it is assumed that all assets are worthless and all agreements are considered. As such, it reflects the amount payable by a partner by virtue of any guarantee or indemnification. As with any guarantee, the analyst needs to make a determination of the likelihood of the guarantee being called upon and, if so, to what extent the each of the parties will be responsible for.

CONCLUSIONThe various tax characteristics of each form of business

ownership presents the analyst with challenges and opportunities in the valuation or forensic accounting engagement. Partnerships are the most transparent of the three general forms of ownership but still present issues that the analyst needs to address. The analyst should have a thorough understanding of the operating agreement and its provisions, specifically with regard to distributions. While S corporations are also flow-through entities for federal income tax purposes, they are still corporations under state law and, as

such, have limited shareholder reporting. C corporations are the least transparent; the analyst must rely heavily on financial statement footnotes (to the extent they exist) and well thought out information requests through the discovery process.

John T. Alfonsi, CPA/ABV, CFF, CFE, CVA, MST is a managing director at Cendrowski Corporate Advisors (CCA) with offices in Chicago, IL and Bloomfield Hills, MI where he is the business valuation practice leader. John is also an adjunct professor at Walsh College in Troy, MI where he teaches courses in their Masters of Tax program.

Walter M. McGrail, JD, CPA, is a principal at CCA, where he is the tax practice leader. Walt also provides litigation support services and focuses on real estate related matters.

EDUCATION: BACK TO BASICSContinued from page 28

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I hope you enjoyed last issue’s interview with Gene Cole. Our interview series continues, with this issue featur-ing Chris Mutchler, CPA, CVA, CFE. Chris is located in Bremerton, Washington (probably a Seahawks fan

who really believes Seattle beat Green Bay in the very last game officiated by the replacement refs).

Chris has been practicing solo since December 2012 at Christopher T. Mutchler, PLLC (chrismutchler.com). Chris still maintains a tax practice, but is moving toward specializing in business valuations. So far, his clients have covered a wide variety of industries and ranged up to ten million dollars in revenue. Here’s his story.

Rod: What was your first year like, and what would have made it better?

Chris: With my wife’s blessing, at age forty-nine and with twenty-five years in public accounting and private industry, I decided to venture out on my own. I would be leaving a large local firm where I practiced for eleven years. The majority of my work consisted of taxes, with an occasional valuation thrown in. It was Warren Miller, CFA, CPA, who a few years earlier encouraged me to open a practice that focused on business valuations, saying “I know you have the best of intentions, but nobody wants to see a cardiologist who performs only a few procedures a year.” After informing Warren of my decision, he was delighted and said, “If your wife supports you, you will not fail.”

I selected a nice location for an office in an area zoned

“neighborhood business,” adjacent to Kitsap Lake in Bremerton, where I grew up. We leased about 1,000 square feet in a space that used to belong to a spa-type business. Over a period of six months, we converted one room into a conference room, two others into private offices, a small

laundry room into a kitchenette, and another room for storing supplies and what has turned out to be an incredible Toshiba copy/fax/scan machine.

Between June and September, it was nothing but planning on paper and arriving at a budget. In October, I met with a team of contractors (and good friends) who took my floor plan and made the office layout happen without any delays. They would individually tell me, “I have been waiting for you to do this!” In my spare

time, I came in to repaint the doors, clean up construction debris, and build custom furniture and shelving. I have said on several occasions that the most difficult decision I had that year was what color to paint the office interior (charcoal blue)!

We already owned the domain name “chrismutchler.com” for personal purposes. (I’m Christopher … my wife and office manager is Christine … chrismutchler.com—you get it, right?) I had experience designing websites and, most important, using “meta tags” and search engine optimization tools. Once we officially opened, I modified the website for the business so new clients could find me. (As a result of other CPAs leaving my previous firm, the

“Practicing Solo” features interviews with our industry’s seasoned sole practitioners. If you are itching to join the solo ranks, or striving to be more efficient and effective in your established one-person firm, this column offers you practical advice, steeped in experience from the trenches, that can move you forward.

Practicing Solo

By Rod P. Burkert, CPA/ABV, CVA

•

•

INTERVIEW: CHRIS MUTCHLER

Chris Mutchler


the value examiner36


July/August 2015

remaining professionals, including me, were compelled to sign a covenant not to compete. When I left, I assumed I would not take any of my existing clients with me.) I decided to open the practice in late December, when I would have a better shot at survival by entering into a tax season with the potential for getting new clients.

After a regular staff lunch meeting on December 4, 2012, I was able to herd the partners together to inform them of my decision to open my own firm that would specialize in business valuations. I would be closer to home, only one mile from my mother’s house where I grew up, and my wife wanted to retire from the phone company as a data technician to work with me. The relationship with my former employer remained intact, and within my first month they sent me my first valuation engagement.

We received our certificate of occupancy on Christmas Eve. I spent the next few weeks learning a new tax software, purchasing a time/billing system, establishing client codes, drafting a quality control documents, checklists and engagement letters, applying for malpractice insurance, and changing my state licensing information.

Around the end of January, e-mails started streaming in: “Chris, can you still do my taxes?” My old firm sent notifications to all of my clients about my departure and to whom their account was now assigned. They wondered, “What happened to Chris?” As soon as they Googled me, they found our website at the top of the list! What I learned from all of this is the bond between client and CPA is very strong. By the end of that tax season, at least half of my clients had transitioned over to my firm.

The owner of the local business journal was also a friend of mine, and he published an article about my new firm in January 2013, which also helped quite a bit. I was now getting referrals from other local CPAs for valuation work.

In August 2013, Christine formally announced her retirement from the phone company. She has become a notary public and attended courses in accounting and taxes at the local community college. By next tax season, she hopes to become an enrolled agent.

Rod: Do you practice in a specialized niche today?Chris: In valuations, my niche is the restaurant

industry. Edward F. Moran Jr., who authored BVR’s Guide to Restaurant Valuation, was my first NACVA instructor

back in October 2005. I have stayed in touch with Ed, and he has been a great mentor. I have also wanted to create a “sister niche” in accounting and taxes for wineries and craft breweries. There are many wineries in eastern Washington, and that market has seen incredible growth, but I have begun to develop a reputation among the local craft brewers on my side of the state. I am also one of the very few certified fraud examiners (CFE) on the Olympic and Kitsap Peninsulas. And while that CFE designation is helpful with valuations that have a fraud component, my practice has kept me busy enough to the point that I refer “fraud-only” work to other professionals.

Rod: What has been your best marketing tactic?Chris: Without a doubt, our website.Rod: How do you price work?Chris: I charge a fixed hourly rate, which I believe is

commensurate within our community, with no provision for value pricing. We have just completed our third tax season without any write-offs or complaints regarding fees. I use Billing Tracker Pro software to invoice my clients and provide them with detailed invoices for all engagements, much like a law firm would. I also like the ability to provide services at reduced fees when appropriate. I believe it is important to be able to give back to the community whenever we can.

Rod: How do you differentiate yourself from larger firms?

Chris: We call ourselves “The Craft Brewery of CPA Firms.” Our philosophy is: treat each client as if he is our only client. We do not provide any bookkeeping or payroll tax services. We have relationships with very competent individuals (Quickbooks® Advisors) who do that work and refer the federal tax and occasional valuation work to us. It is truly a win-win proposition.

Rod: Do you work from a home office or an “office” office?

Chris: The latter. I think it’s important to separate work life from our personal/home lives, and to me that ability is definitely worth the cost of my rent.

Rod: What is your current mobile device?Chris: A Samsung Galaxy 4 phone, which is the one my

wife bought me.

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Rod: Describe your current computer workstation set up.

Chris: Perhaps the greatest advantage I had in starting my own practice was access to an awesome IT professional. He became a client around 2002, and we soon became friends. I provided him with my anticipated needs, and he configured and installed everything:

Rod: Besides your phone and computer, any office hardware or software that you just couldn’t live without?

Chris: Our standalone four-channel DVR is nice. When we’re in the office, we can see/watch clients coming and going from our computer monitors (we don’t have a receptionist). When we’re out of the office, we can monitor it in real-time on our phones. Early one morning, I received a call from the alarm company because a motion detector activated a signal. By pulling up the cameras on my phone, I could immediately tell it was a false alarm.

Rod: What do you listen to while you work?Chris: I have a Vizio Smart television mounted in my

office, which is generally tuned in to Fox News. I can also pair the television with YouTube videos and some live-streaming events on the Internet.

Rod: What tool(s) do you use to manage your to-do list? (e.g., paper, Evernote, etc.)?

Chris: I have a 3’ x 4’ whiteboard mounted on the wall next to my desk that I use to track my long-term projects.

Every morning, I write that day’s to-do list on a Post-it note and go from there.

Rod: What are your bestmcost-saving ideas?Chris: Configuring the office in such a way that we do

not need a receptionist and utilizing outside accountants so we avoid the cost of hiring staff. The Drake tax software is also a bargain. If you purchase early, you can get Drake Unlimited for $1,095. This includes all entities, states, and even access to the previous year’s software. It also includes a client write-up program (that I do not use) and a 1099 e-filing feature, which I only use about a half-dozen times a season. I read about Drake in the Journal of Accountancy’s annual tax software surveys and thought that it would be “too good to be true.” When in Dallas for the annual NACVA Conference in June 2012, a colleague, who owns a solo practice, demonstrated the Drake software he used in his office, and I was sold.

Rod: How about your favorite productivity tip that saves you lots of time?

Chris: Our office is nearly 100 percent paperless. When I need to access client documents, they are logically organized on the file server.

Rod: What method/system/tool do you use to stay organized?

Chris: Keep the office clean.Rod: Early bird or night owl–what’s your sleep routine?Chris: I generally wake up at 3:00 AM every morning

(including weekends) … usually get to the office by 4:30 AM … and work until at least 4:00 PM. [Rod: I had to follow up and ask why Chris rises and retires so early. Chris’s response: I love the mornings. I see it get light out at 4:00 AM. I have no traffic on the way to work. I clean the office and go for a four-mile run before most people are out of bed. When we got home last night, I mowed the back lawn, and Christine and I played a game of croquet and enjoyed some wine. I retire between 7 and 8 PM. There is nothing good on TV anyway–when has anyone produced a decent TV show since Hill Street Blues?

Rod: Do you have liability insurance?Chris: Yes–Camico. One benefit I’ve seen with them is that

they have an excellent resource library of engagement letters, including those that cover BV engagements. They elaborate much more than the AICPA’s guidance on such letters.

Chris Mutchler’s home office

the value examiner38


July/August 2015

Rod: Do you have a support group to call on?Chris: I wish we had an active state chapter of valuation

professionals in Washington. That being said, there are wonderful BV and tax professionals that I contact locally and throughout the country when I have questions and issues.

Rod: Who reviews your work?Chris: I am a strong believer in using the valuation

checklists provided by NACVA and the AICPA. I do not use “valuation software.” I drafted all of my BV templates and worksheets from scratch. After I have gathered the facts, financial information, performed my analysis, and drafted the report, I set it aside overnight and give it a fresh look the next morning over coffee. Christine then reads the report, and I provide draft copies to my clients to review “for content” prior to issuance to ensure I have not made any factual mistakes. I do not have other valuation professionals review my work due to client confidentiality.

Rod: How do you stay technically current with changes in the profession?

Chris: By attending quality CPE courses, networking with great people, and reading e-mails from NACVA regarding changes to the professional standards for reviewing valuation reports. During this last tax season, I had lots of correspondence with other tax and BV professionals regarding how to handle the new IRS Tangible Personal Property Regulations … before the IRS decided to say, “Never mind.”

Rod: What’s your work-life balance like?Chris: My car license plate frame says it best: “Can’t

sleep now. Clowns will eat me.” If you don’t understand it, I cannot explain it to you.

Rod: What practice areas do you think offer the most promise to someone going solo now?

Chris: If the economy ever kicks back into gear, I see business valuations for succession planning and gifting of family limited partnership interests as growing segments. And I think there will always be a need for dissenting shareholder and deceased owner valuations.

Rod: Finish this sentence: If I knew then what I know now, I would …

Chris: … have initially set up a Facebook page for my firm to create more Internet SEO juice, which I only did recently.

That’s a wrap! Do you have a Practicing Solo issue you would like me to address? E-mail me at [email protected]. Looking for advice on how to build your practice or redesign your life? Post your question on Practice Builder Academy TV at www.AskPBA.com.

Rod P. Burkert, CPA/ABV, CVA, is president of Burkert Valuation Advisors, LLC (burkertvaluation.com). His engagements focus on income/gift/estate situations and working with successful business owners who are looking to make a transition. He also provides independent report review and project consulting services to assist fellow

practitioners with their assignments. Rod recently co-founded Practice Builder Academy (practicebuilderacademy.com), a twelve-month mentoring program that teaches proven strategies to BVFLS professionals who want to build their practices and redesign their lives.

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Demand for Financial Forensics Services Set to SoarDue to increased regulation and regulatory enforcement, an increasing number of financial crimes, and a record number of bankruptcies and corporate restructurings, the demand for financial forensics and forensic accounting services is set to soar.

To help CPAs and other financial service professionals obtain the necessary training, certification, and credibility so they can grow and thrive in these areas, the National Association of Certified Valuators and Analysts™ (NACVA®) and the Consultants’ Training Institute™ (CTI™) offer specialized certification and training programs, and the Master Analyst in Financial Forensics™ (MAFF®) credential.

The MAFF designation offers practitioners seven different pathways to acquire specialized training and the credibility necessary to practice in the financial forensics profession.

Master Analyst in Financial Forensics™ (MAFF®)

Seven Specialty Tracks to Obtain the Master Analyst in Financial Forensics (MAFF) Credential:•Commercial Damages and Lost Profits•Matrimonial Litigation•Bankruptcy, Insolvency, and Restructuring•Business Valuation in Litigation•Business and Intellectual Property Damages•Forensic Accounting•Fraud Risk Management

The live and online programs offered in these specialty tracks define both the legal and professional environments today in order to introduce relevant precedents, case law, and professional standards.

To learn more, call Member/Client Services at (800) 677-2009.

MAFF May2015 SoarAd.indd 1 5/11/15 5:42 PM

We are excited to introduce four Regional Specialty Conferences in 2015 that will bring the industry’s pioneers, emerging

leaders, critical updates, and developments to the profession on a regional basis. These events will also be broadcast online; therefore, you can view them from your office or home and still be able to achieve continuing professional education (CPE) credit.

These conferences will showcase known, established experts alongside emerging trailblazers, resulting in a dynamic experience that will offer you both premier education and a unique innovative perspective. In addition to exploring technical content, these conferences will also delve into an underexplored, but pivotal zone—practice management. It is not enough anymore to have technical skills and acumen. For today’s business valuation and financial forensic analysts to increase their competitive edge and render the most profitable results from their training and designations, they must know how to effectively promote themselves and their practice.

Daily Conference Registration Fee (live or online broadcast):

NACVA, ADAM, or IBA Members $540

Non-Members $600

Early registration discounts available for all conferences. NACVA recertification courses and Certificate in Exit Planning require separate registration fees.

Featured Keynote Presentations

Upcoming Regional Specialty Conferences

Lee FrederiksenGrow Your Practice: How to Create a High Growth Firm September 15—Pittsburgh, PA

How to Become a High Visibility Expert December 8—Ft. Lauderdale, FL

Robert Grossman and Mark KucikIndustry Standards Update September 16—Pittsburgh, PA

Mel Abraham and Rod BurkertPractice Builder AcademyTM—Strategies to Create a Business Valuation and Forensic Litigation Services Practice You Love Coming to and Find Success In October 20—Houston, TX November 18—San Diego, CA December 9—Ft. Lauderdale, FL

Honorable Christopher P. YatesPerspectives from the Bench October 19—Houston, TX

Z. Christopher MercerUnlocking Private Company Wealth November 17—San Diego, CA

Lee Frederiksen Robert Grossman Rod BurkertMark Kucik Christopher P. Yates

Mel Abraham Z. Christopher Mercer

September 14–16 Pittsburgh, PA Business Valuation Conference

October 18–20 Houston, TX Financial Forensics and Expert Witness Conference

November 16–18 San Diego, CA

Exit Planning, Transaction Advisory Services, and Healthcare Valuation Conference

December 6–9 Ft. Lauderdale, FL

Business Valuation, Healthcare Valuation, Financial Forensics, Mergers and Acquisitions, and Transaction Advisory Services Conference

Regional Specialty ConferencesNEW

To learn more, please visit www.NACVANation.com, or call Member/Client Services at (800) 677-2009.

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