Business Valuations

Business valuation and professional practice valuations differ widely. Business entities include S-corps, LLCs, C-corps, Partnerships, Family Limited Partnerships, and LLPs. The valuation issues include shareholder and Member disputes, division of marital assets, gift tax, charitable donation, employee stock option plans, decedent estate, bankruptcy, and buy-backs, and reorganization 

There are different applicable types and definitions of value. Fair Value is the standard in shareholder disputes, divorce, and buy-backs.  Fair Market Value is the standard in IRS related decedent estates, non-cash charitable donation, and gift tax appraisals. Market Value is the standard in federally regulated lender transactions.

Fair value is the standard in Massachusetts for shareholder/LLC disputes and for divorce. Most other states have adopted a similar definition of fair value that mirrors the American Law Institute's definition of fair value.  The ALI endorses the national trend of interpreting fair value as the proportionate share of a going concern “without any discount for minority status or, absent extraordinary circumstances, lack of marketability.”  The ALI has further recommended that to determine fair value, the trial court must determine the aggregate value for the firm as an entity, and then simply allocate that value pro rata in accordance with the shareholders' percentage ownership

CPA versus Investment Banking Approach

The Certified Public Accountant relies heavily on IRS Revenue Rules. CPAs often use IRS fair market value and attempt to utilize valuation methods involving analogous comparison with publicly traded securities and private sale transactions.  

Durkin Valuation Consultants approach to enterprise valuation is from the viewpoint of an investment banker rather than from the view of the accounting profession. We view the valuation of an enterprise as a going concern based on historical net cash flow or as liquidation value based on assets less liabilities. 

Investment banking financial analysis seeks to determine the economic exchange value of an enterprise through financial analysis based on net cash flow, earnings before taxes and depreciation in the same manner as financial analysts measure the value of publicly traded securities. 

CPAs tend to rely on various forms of accountant prepared financial statements. There are three common types of accountant prepared financial statements; audited, reviewed, and compiled. None of the accountant prepared financial statements, including audited financial statements warrant the numbers to be accurate. The only “warranty” is that the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP). We rely on federal tax returns because the business owner/officer signs the return under penalties of perjury and the tax preparer now has under IRS Circular 230 enhanced liability. 

GAAP financial statements do not hold up as to "Telling the truth, the whole truth, and nothing but the truth." There are many reasons why GAAP financials do not hold up. Here are a few: • Because balance sheets report original costs for assets, they are telling the truth about cost but not the whole truth because those values are not timely descriptions of current fair value or conditions. Assets on balance sheets, like machinery or equipment could be non-working, long ago discarded, but still on the books. There is no truth in expenses and book values produced through systematic depreciation because those numbers are made up. • Balance sheets omit some assets, such as marketable R&D ideas and leased assets. • When off-balance-sheet financing occurs, balance sheets obviously are not telling a truth.Financial statement measures for defined-benefit pensions pretty much miss on all three counts because they are not true, they obfuscate the facts, and depend on fabricated assumptions. There should be a disclaimer accompanying all GAAP financial statements: "WARNING - the issuer of the accompanying financial statements makes no representation or warranty that the numbers are accurate and contain the truth, the whole truth and nothing but the truth. The user assumes full responsibility for all consequences of relying on their contents."

Background Experience

Roger Durkin began his financial analysis and enterprise valuation activities in the mid-1960s. He personally was a Member of the Philadelphia-Baltimore-Washington Stock Exchange, an Associate Member of the Pittsburg, Boston, Cincinnati, and Montreal Stock Exchanges.  His stock brokerage firm, R. P. Durkin & Company, Inc. was a Registered Broker/Dealer with the Securities and Exchange Commission. He was a Principal Member of the National Association of Securities Dealers.

R.P. Durkin & Company, Inc. was a regional firm with several satellite office throughout Massachusetts and New Hampshire. Durkin taught the financial analysis and regulatory courses to Registered Representative Candidates. We made primary dealer markets in publicly traded bank stocks and regional company stocks. We were underwriters of initial public offerings (IPOs) and members of syndicates that handled IPOs underwritten by other broker-dealers. Durkin was part of the syndicate that took the Patriots public. The stock brokerage firm had a venture capital subsidiary, Synercap Corporation that helped startups with management structure and raising private capital.

Most of our appraisal work involves litigation support to the law profession; therefore, we prepare our appraisal reports in anticipation of providing expert testimony.

Various appraisal practitioner utilizes different appraisal standards and methods. CPAs must follow the AICPA Statement on Standards for Valuation No. 1 because the AICPA rules are state statutory requirements for licensed Certified Public Accountants. Most CPAs tend to rely on IRS Revenue Rule 59-60. However, IRS regulations do not apply to Massachusetts divorce appraisals. Under Bernier v. Bernier SJC-09836 448 Mass. 774 (2007). IRS standards do not apply to shareholder disputes.  Bernier applies tax effecting, and does not consider hypothetical buyers, and does not use of minority or marketability discounts. IRS Revenue Rule 5960 does apply in decedent estate, gift tax, or non-cash charitable donations. The IRS also the Uniform Standards of Professional Practice (USPAP).

There are many business enterprise appraisers from accountants, financial analysts, business brokers, and sometimes real estate brokers. The appraisal methods range from business brokers use of capitalized discretionary income and rule of thumb approach, to some who use comparable private transactions and or comparisons to publicly traded securities. 

A professional business valuation appraisal report can be a vital element in the negotiated or litigated division of a marital estate. A business valuation is equally important in filing decedent estate tax returns, in negotiating shareholder disputes, or in support of a shareholder exit strategy buy-sell agreement. 

Durkin Valuation approaches the valuation of an enterprise from the economics of investment banking rather than simply applying accounting convention.  In addition, our appraisals consider applicable state and federal case law. In Massachusetts for example, Bernier v. Bernier SJC-09836 448 Mass. 774 (2007).We have valued small businesses and professional practices that gross under $100,000 and we have valued multi-million dollar businesses such as the Quincy Shipyard for the U.S. Maritime Administration; the former Soviet Academy of Sciences Pharmaceutical facility in Riga, Latvia for the Republic of Latvia, and complicated businesses like of the liquor business of James J. “Whitey” Bulger for the U.S. Attorney.

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