New and events of the Philadelphia Bar Asso.
Issue link: https://thephiladelphialawyer.epubxp.com/i/574228
the philadelphia lawyer Fall 2015 15 considered by the expert to determine the fair market value. No general formula is applicable in all cases. A sound valuation will be based upon all relevant facts and the elements of common sense, informed judgment and reasonableness to weigh those facts and determine their aggregate significance. The result is that the expert provides an opinion of value, not merely a mathematical calculation. Before applying any of the above methodologies, business appraisers financial statements and determine reasonable compensation. these terms mean are the purposes behind them? The process of normalizing the financial statements is designed to eliminate certain income or expenses that were abnormal in a particular year, and not expected to re-occur after the business is purchased by the buyer. Because of the inherent control exercised by many small business owners, the owners have the ability to alter their salaried compensation, often to manage cash flow throughout the year. The process of determining reasonable compensation to the owner/manager is designed to separate the salary that a manager may normally earn under similar circumstances, and the profits earned by nature of the ownership of the business. This is important, because the hypothetical buyer is purchasing the business for the collection of profits, rather than purchasing a job for wages. Family om the value of a business, but includes enterprise do you use to differ a factor in valuing a business for a purpose other Goodwill is the difference between the value of the business, and the value of the net assets of the business. It is well settled in Pennsylvania that the personal goodwill of the spouse, as distinguished from the goodwill of the business itself, is not a marital asset and therefore, is not subject to equitable distribution. The basis for this settled law is well reasoned. Equitable distribution concerns the monetary worth of the business, not the monetary worth of the individual owner. In evaluating the attributes of personal goodwill versus the attributes of business goodwill, the multi-attribute utility model is a useful guide that provides factors to consider between the two. The factors are as follows: • Ability, skill and judgment of the owner • Work habits of the owner • Age and health of the owner's reputation • Staff loyalty to the owner • Practice carries the owner's name • Name recognition of the owner • Referrals are to the owner • Closeness of contact with the owner • Importance of the owner service • Overall business reputation • Effective workforce in place • Non-personal business name • Favorable business location • Multiple locations • Practice-wide marketing • Referrals to business rather than to owner • Business owns intellectual property The valuation expert attempts to allocate the goodwill based upon his analysis of the factors outlined above. For business sales to independent third parties, goodwill often requires an earn- out to ensure that the selling party is only paid a purchase price that includes the goodwill if the goodwill remains with the buyer. Therefore, a portion of the purchase price may not be payable to the seller until a year after the closing, and a calculation is often completed to determine the amount of the earn-out period. for cash receipts? Sometimes a business receives cash payment for services or merchandise, and those payments may not have been recorded in the financial statements or tax returns of the business. The expert uses several methods to ascertain whether substantially all cash receipts are recorded in the books and records of the business. While not all cash may be detected, a profit margin analysis may be performed to compare the business's profit margins to the industry's profit margin. Sometimes a lifestyle analysis is performed to determine how the business owner is meeting his cost of living. of a buy/sell agreement, if any, on a business valuation? Buy/sell agreements will be respected by the courts if they are demonstrated to be binding contracts upon the business owners, and have been followed as part of the normal course of recent buy-out transactions. With regard to family law cases, even if a spouse believes that the business may be worth more than the value stated or the formula used in a buy/sell agreement, a spouse may not be entitled to superior rights in a business valuation than the business owner would be entitled to in accordance with the terms of the contract. Julia A. Auerbach (jauerbach@astorweiss. com) is a partner at Astor Weiss Kaplan & Mandel, LLP. A sound valuation will be based upon all relevant facts and the elements of common sense, informed judgment and reasonableness to weigh those facts and determine their aggregate significance.