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Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

Do Attached Strings Affect the Value of a Gift?

October 2015 | Issue 82 Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes. Introduction In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four […] More...

Dodgy Fairness Opinion Earns Financial Advisor a Trip to the Woodshed

July 2015 | Issue 81 Vice Chancellor Laster of the Delaware Court of Chancery was underwhelmed, to say the least, by the quality of the fairness analysis put forward by the Conflicts Committee and its Financial Advisor in connection with the approval of the pricing of a major financial transaction between two related public companies. […] More...

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Question – Is there a single standard of value that is used in business valuations?

Answer – No, there are a number of different definitions and standards of value that are used in business valuations. These standards arise out of the purpose and legal circumstances for which the valuation is being performed. For example, one commonly used standard of value is fair market value. This standard is used in most appraisals done for income and estate tax purposes. The definition of fair market value is “the price at which the subject property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell both parties having reasonable knowledge of relevant facts.”

Other standards of value include fair value and investment value.

Question – What is a discount for lack of marketability?

Answer – A discount for lack of marketability is a valuation discount applied in the valuation of an asset which the holder may have difficulty in selling because of such circumstances as a lack of an organized market place for the asset or some particular characteristics of the asset which make it more difficult to sell. The discount for lack of marketability is usually applied to a starting value which is based on a liquid market price, such as that found for publicly traded stock.

Question – What is a minority discount?

Answer – A minority discount is a discount applied in a business valuation to reflect the fact that the ownership interest being valued is a minority interest and thus lacks certain benefits that would be attributed to a controlling interest in the company being valued.

Question – What is goodwill impairment?

Answer – Goodwill impairment occurs when the value of the goodwill of a business unit declines to an amount less than the carrying value of the goodwill on the company’s books. With the adoption of SFAS 142 by the Financial Accounting Standards Board (FASB), audited companies are now required to test goodwill annually for impairment. This testing is done by valuing the business unit having the goodwill.

Question – What is a family limited partnership?

Answer – A family limited partnership (FLP) is a business entity established to hold business or financial assets of a family. FLPs provide a number of advantages including centralized asset management, protection from creditors, and the ability to apply valuation discounts to the partnership interests for estate and gift tax purposes.

Question – Does Hempstead & Co. provide expert witness services?

Answer – Hempstead & Co. is frequently called upon to provide expert witness services in connection with its valuation and economic damages services.

Question – Does Hempstead & Co. value intangible assets?

Answer – Yes, as part of its business valuation practice, Hempstead & Co. provides valuations of intangible assets. These intangible assets include goodwill, patents, trademarks, copyrights and other intangible assets.

Question – What is loss of business damage analysis?

Answer – When companies or individuals have been harmed through the action of another, they sometimes will seek to recover damages through legal action. Loss of business damage analysis is a financial analysis carried out to determine the amount of injury or damages suffered by the party which has been harmed. The concept of discounted cash flow is frequently applied in calculating such damages.

Question – What is a fairness opinion?

Answer – A fairness opinion is a report of a financial analysis of a business transaction. The focus of the analysis is to determine whether a particular transaction is fair from a financial standpoint to a specified party to the transaction. Fairness analyses are often used to insure the fairness of a transaction to a parties who are not directly involved in the negotiation of the transaction, such as shareholders or retirement plan beneficiaries. Fairness analyses are often commissioned by company directors and officers so that they may have the benefit of assurance from an independent outside party that a transaction is fair and may demonstrate that they have taken steps to assure others that the transaction is fair.