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EBITDA and Fair Market Value

Gary W. Baum 01 July, 2015
Posted in: Advisory
 

One of the main differences between the world of real life transactions and the fair market value world is the way that interest and taxes are taken into account in a valuation. One of the key measures that is often used in mergers and acquisitions is EBITDA - earnings before interest, taxes and depreciation. In the fair market value world under the income method of valuation we are also looking at the cash flow of a company, but we assume that the capital structure will remain in place. How does this impact the fair market value of a company?

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When Goodwill has No Value

Gary W. Baum 01 June, 2015
Posted in: Advisory
 

Recently, I have dealt with a number of issues relating to the valuation of goodwill. One particular case involved a company that had been in business for a number of years and had created what would appear to be goodwill. Its name was well recognized and well regarded among its customer base that had consistently made purchases from the company. There was every reason to believe they would continue to do so based on their experience with the company's high level of customer service. But, there was a problem.

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The Rule of Thump

Gary W. Baum 04 May, 2015
Posted in: Advisory
 

Rules of thumb are often used by business owners to value a business. In some cases, the rule may be a general recognition that many small companies sell for a certain multiple of cash flow. In other cases, the rule of thumb can be more specific to particular industries. However, the use of these rules can be problematic.

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"It was a Very Good Year" - 1959 Ruling Stands the Test of Time

Gary W. Baum 22 April, 2015
Posted in: Advisory
 

In the recent Federal case of J&M Distributing, Inc. v. Hearth & Home Technologies, Inc. (2015 U.S. Dist. LEXIS 2314) the plaintiff claimed that its damages for breach of contract were tied to the fair market value of its business. In establishing that value, the plaintiff's expert relied on guidance from Revenue Ruling 59-60. The defendant however, claimed that the Ruling only applied in tax related matters and not in damages calculations. How did the court rule?

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Valuation Factors for a Franchise

Gary W. Baum 06 April, 2015
Posted in: Advisory
 

On the southeast corner of a major, urban intersection is an established privately-held "fast food" hamburger restaurant. On the northwest corner of the same intersection is a McDonald's restaurant. Both have been in business the same length of time. Both have similar access to auto and pedestrian traffic. Real estate and improvements are virtually identical. Both have annual, after-tax net cash flow of $150,000 and are expected to maintain that level of cash flow for the foreseeable future.

What are the values of the two restaurants? Most people would answer that the McDonald's is worth more. 

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Earning Capacity: The Critical Piece of the Puzzle

Gary W. Baum 30 March, 2015
Posted in: Advisory
 

Many small businesses don't earn enough money to create value. In some cases, their earnings may not provide the owners with adequate compensation despite the fact the companies have existed for decades with excellent reputations and an established customer base. Their owners worked hard to build the businesses, but they lack one important thing-earning capacity.

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Champagne Wishes and the Valuation Issues of the Rich and Famous

Gary W. Baum 25 March, 2015
Posted in: Advisory
 

The opportunity to gawp at the lifestyles of the rich and famous was a side benefit to taking a look at a dispute over active vs. passive appreciation in the divorce arena. The case of Hamm v. Hamm in the Oklahoma District court was concluded last November. The Memorandum Order runs to 80 pages, meticulously dividing the frankly huge marital estate of Harold and Sue Ann Hamm. 

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Why Financial Statement Adjustments Are Made in Valuation Process

Gary W. Baum 09 February, 2015
Posted in: Advisory
 

Clients are often mystified by the adjustments business valuation analysts make to financial statements when we start to value a business. Let’s explore the most common adjustments and why they are made. 

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"I'm a Lumberjack and I'm OK!" - Cash Flows from Timber Apparently Trump the Value of Land

Gary W. Baum 29 January, 2015
Posted in: Advisory
 

What a great start to 2015 - when a recent case allows me to include a reference to the halcyon days of Monty Python (and gives me an excuse to waste far too much time reliving classic skits on YouTube!).

Last December, the Ninth Circuit gave a short ruling overturning the Tax Court's determination in the matter of Estate of Giustina v. Commissioner (2014 PTC 587). The issue was the valuation of a 41% interest in Giustina Land and Timber Co. Limited Partnership owned by Mr. Giustina on his death. The Partnership held land on which it conducted timber operations. The Estate valued the interest at $12.6 million on the estate tax return. The IRS argued that the value of the interest was $35.7 million.

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Who needs to go to Vegas? Small business owners can gamble for high stakes from the comfort of their offices!

Gary W. Baum 22 January, 2015
Posted in: Advisory
 

Once a business succeeds and becomes a significant part of the net worth of the shareholders, an improperly drafted buy-sell agreement can literally result in a lottery as to which of the shareholders dies first – since in some cases the agreement provides that the remaining shareholder can buy the interest at book value or for a figure based on a formula that does not truly reflect the fair market value of the business at the time of death.

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