Problem: Valuations are often performed on subsets of a company’s operations. In this case, Forensics CPA Tax, PLC was hired to determine the fair market value of a business’s client lists and its in-place workforce for potential sale.
Action: Valuation of a company’s client list, an intangible asset, involves three key factors: number of clients, revenue per client, and client attrition rate. Using statistical techniques, we determined a predictive attrition rate, that when combined with the other two factors discounted back to the present, allowed us to determine a fair market value for the client list. We then used the replacement-cost approach to determine the value of the in-place workforce, in this case several hundred employees. We stratified this workforce into hourly employees, non-exempt administrative staff, and exempt management. We then calculated the employees’ wages and salaries, recruitment, on-boarding, and training costs, as well as productivity losses associated with new hires. Ultimately, Forensics CPA Tax, PLC determined a replacement cost for the in-place workforce.
Result: Our findings became a starting point for fruitful negotiations for the sale of the company’s client lists and in-place workforce.
Problem: A senior associate of a law firm was asked to join the partnership. The firm had never previously made such an offer. To help her make her decision, the associate hired Forensics CPA Tax, PLC to determine the partnership’s buy-in worth.
Action: First, we determined the entire practice’s fair market value, a fairly straight-forward calculation, and from this the value of a minority ownership share in the firm. A minority owner is typically not given decision-making authority regarding compensation, capital investment, or firm strategy. This calculation therefore incorporated Discounts for Lack of Control (DLOC) and Discounts for Lack of Marketability (DLOM) to reflect the position’s relative lack of control and lack of liquidity.
Result: The senior associate used our analysis to negotiate a fair buy-in price.
Problem: Partner A went into business with Partner B. Partner B had several other business and took a 70% stake in the company he'd set up with Partner A. Partner B wound up suing Partner A for damages, when Partner A started a competing business. Partner B had a business valuation done to document his losses in the arrangement.
Action: We determined that Partner B had received benefits far in excess of what he claimed via tax losses he used to shield income from his related businesses. We pointed out so many inconsistencies and gaps in logic with the business valuation Partner B had done, that it was withdrawn as an exhibit to his case.
Result: We testified in court, and our client, Partner A received a favorable ruling.