Valuation in a Business Divorce

THE LEGAL INTELLIGENCER BLOG
Valuation in a Business Divorce
Terry Silver, The Legal Intelligencer
March 19, 2015

My advice to lawyers and CPAs is to prepare your clients for the prospect of a business divorce. A business relationship is no different than a marital one; people change, circumstances change, and people grow (and don’t grow) in different directions. And by “preparing for a business divorce,” I am referring to the need to create an operating agreement from the outset of a business relationship to address the following issues, if and when they arise:

Death of an equity owner;
Disability of an equity owner;
Sale of an equity interest to a third party;
Termination of an equity owner’s employment; and
The subject of this article: the predetermined steps to value an equity interest.

When a new business begins, financial resources are usually devoted to its tangible needs, while intangible needs are usually delayed. An operating agreement is typically recognized as an intangible need that can wait until cash flow improves. I, however, advise both new and newer business owners to negotiate the terms of an operating agreement as early in the business life cycle as possible, as once issues develop, it will be too late to negotiate a mutually acceptable operating agreement.

To address valuation, an operating agreement typically will either provide a specific method to value the business, or will designate the means by which to value the business. For example, the operating agreement can specify a methodology such as 5 x EBITDA or 1.5 x revenue. I strongly advise against this approach for two reasons: (1) The person selecting the valuation approach is most likely not qualified in business valuation, so the method selected may be flawed; and (2) there is no one correct way to value a business. As time and circumstances change, so too may the appropriate method to value a business change.

For these reasons, a fixed valuation method, to be used for all time, is ill-advised. I recommend the operating agreement specify the business be contemporaneously and independently valued, and the valuation be binding, as to avoid time-consuming and costly litigation. I further advise the operating agreement specify the credentials of the business valuator chosen to insure a credible valuation product. Commonly accepted valuation credentials include ASA, CVA, ABV and CFA.

Lastly, there may be a dispute between owners in the selection of the business valuator. This can be avoided by incorporating a provision in the operating agreement that enables each owner to select a business valuator. These two business valuators, in turn, jointly select the final business valuator, whose valuation opinion will be binding. This is a lesser used provision, as it is almost always preferable for the parties in dispute to choose a mutually acceptable valuator.

Taking the time in the early stage of a business to address potential adversarial issues via the operating agreement will save a great deal of time, anxiety and money once problems develop between owners.

Terry Silver is a partner at Citrin Cooperman, a full-service accounting, tax, and consulting firm with offices located throughout the Northeast. Based in Citrin Cooperman’s Philadelphia office, Silver focuses his attention on business valuation services and mergers and acquisitions. To learn more, visit www.citrincooperman.com.

http://www.thelegalintelligencer.com/all-news/id=1202721048001/Valuation-in-a-Business-Divorce?mcode=1202615493286&curindex=0&slreturn=20150220005029

Frederick Forsyth lost his fortune through a share fraud and divorce.

Frederick Forsyth: 'I lost £2.2m in a share fraud'
Frederick Forsyth lost his fortune through a share fraud and divorce.

By Mark Anstead
Published: 3:37PM BST 01 Oct 2009


Frederick Forsyth: 'Returns are minimal at the moment but I don't run around tearing my hair out' Photo: IAN JONES Have you learnt any difficult lessons about money through mistakes?
I've lost money twice, first in the mid-Seventies under Edward Heath when we were looking at inflation of 22pc or 23pc per annum. After Margaret Thatcher we all forgot what hyperinflation was, but at 23pc everybody's assets were disappearing down the plug hole.

My financial advisers told me to hedge against inflation by buying either gold or diamonds and I bought gem diamonds because their carat rating can be certified. It was a gross mistake – I invested about £200,000 and got back just £133,000 three years later.

My second mistake was trusting Roger Levitt. I saw him as a personal friend, but he turned out to be a con man. He wasn't like Bernard Madoff – Levitt never promised ridiculous levels of return.

His talent was to recommend a portfolio of about 20 shares and then suggest that, since there was a lot of paperwork and you would have to sign 20 cheques, why not let him do it for you? You just gave him one cheque payable to the Levitt Group and he promised to do all the hard work, but in fact I never saw the money again.

How much did you lose with Levitt?
At last count in 1988 my portfolio was worth around £2.2m. I know that because I parted with my wife that year and, because we didn't want to quarrel, I gave her my properties while I took the shares. Then a few years later Levitt was arrested and my portfolio turned out to be worthless – so I went from having been worth £4.6m before my divorce to zero. I had to start all over again and I worked my butt off writing five books in five years to make my second fortune.

Do you still invest much?
Yes. I still have a portfolio of shares, but now I do everything directly and I tell my broker I don't mind if he asks me for 50 cheques – I want to see them going into the different companies. The chances of being ripped off by all of them are then very slight.

Has the fall in market values dramatically affected you?
I'm philosophical about it. I recognise that return on investment is minimal at the moment, but the values of shares are now coming back, so I don't run around tearing my hair out. You hear about people who were worth £100m and their net worth fell to £3m, but £100m is a hell of a lot and probably a large part of that was either borrowed or highly speculative. I am only invested in very solid blue-chip companies or funds operated by known investors who always appear in the top quartile in terms of performance.

How did your childhood experience influence your attitude to money?
There is an old Jesuit saying, "Give me the boy until the age of seven and I will give you the man." The attitude my parents took to money is stamped into my psyche and has never left me.

As middle-class English shopkeepers in the small town of Ashford in Kent, they felt you had to earn money by hard work alone. The idea that anyone could win money, marry it or inherit it was out of the question for them, and cheating, lying, stealing or embezzling was beyond taboo. So I grew up knowing I needed to be very industrious.

I was raised in a fairly substantial semi-detached five-bedroom Edwardian house, and as an only child I had the top floor to myself – a bedroom and a nursery. My father told me that whatever I wanted to do he would support me, and when I left school early to go into the Royal Air Force, he was thoroughly approving.

Are you cautious with money or liberal? Where does that tendency come from?
I'm illogical. I will save and reuse envelopes, telling myself that I'm saving trees, but all I'm really trying to do is save money. On the other hand I'll give money to good causes and then laugh to myself that I save envelopes. I'll turn the lights off in empty rooms because it offends me to see money wasted and I resent people who fritter money away in casinos when it could have been used by someone who needs it.

Now that you are better off, are you happier?
Yes, I think so, but I had it drilled into me as a boy never to worship money. I was in my late thirties before financial success came to me and by then I had travelled the world and had a lot of experience.

Financial freedom is what I value most – I don't have to get up in the morning and go into an office and bow to the boss. And there is comfort in knowing that if I want something, I can usually have it, within reason. I wouldn't think it reasonable to own a private yacht or jet.

How do you separate responsibility for finance with Sandy?
I don't give her an allowance – she just shares a credit card with me and whatever the house needs in terms of food and other consumables is charged to that card. Sandy also has her own bank account and some of her own assets. She has shrewdly invested in a portfolio of shares that generates enough income for her own clothes, but I pay for everything else.

How do you prefer to pay for things, cash, card or cheque?
I'm still very old-fashioned – I like to pay most of my bills by cheque. I am constantly being asked to pay by direct debit, but I keep seeing a high level of inaccuracy in my bills and I often query them because a figure is wrong. So I much prefer to stare at a bill first and then hand over a cheque.

But I also pay by credit card and, thankfully, I've never experienced credit card fraud. But I'm very dubious about it because when you pay over the phone they always ask you for all the details from the card, including the security card number on the back. What's the point of having a security number if you have to tell everybody what it is?

How do you tip? Are you an easy tipper or do they have to work hard with you?
I like to tip in the upper to mid range. I first check to see if it is already included on the bill and if it is I will usually leave a little extra, but if it's down to customer discretion I leave between 12.5pc and 15pc.

What's been your greatest extravagance?
I have indulged in classic sports cars over the years – I've got a Jaguar XKSS and an Austin Healey 3000 – and I love diving or snorkelling twice a year in the tropics.

What kind of a home do you live in?
It's a farm. When I grew up in Ashford it was all agricultural and I was often visiting friends on their farms. I thought one day I would like to have one of my own with all the animals and constant activity. Then in 1988 I bought my Queen Anne Grade II listed farmhouse near Hertford with 175 acres for £350,000 and I love it here – they'll have to carry me out in a box.

Do you invest in individual savings accounts (ISAs)?
Yes, because my accountant thinks they are worthwhile. I never really need the money I put into them so it just sits there and grows tax-free.

Do you use high-interest savings accounts?
I have a deposit account with one small private bank and I simply transfer money from that account into my Barclays current account as I have need. I haven't spread my money around because my bank is run by very frugal people and I don't think it was ever at risk. I ask virtually nothing of Barclays for my current account – I've been with them for 40 years and I just keep it running at just above zero.

Do you bank online?
No, because I'm not computer-literate. And anyway, I'm suspicious of it – I read about people having their accounts penetrated and identities stolen through computer hacking. Every day I sit at my little Japanese typewriter and I tell people it's impossible to hack into a typewriter.

Is there a reduced demand for your services because of the current squeeze?
Thankfully, I negotiated the contract on my new book before the recession started. I only get paid royalties when the advance has been topped out, but my excellent agent usually manages to secure such a ludicrously large advance that it takes several years before that ever happens.

Do you think pensions are a good idea? If not, why not?
When I was a young man I could never envisage being old. I started saving into a pension fund when I was about 40, but I haven't touched the money yet so it's just accruing. I'll either be a rich old b------ in a wheelchair or a rich old corpse.

Frederick Forsyth's next novel, 'Cobra', to be published next year, has already raised £990 for Leonard Cheshire Disability last month after a charity auction to name a character in the thriller


http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/6249853/Frederick-Forsyth-I-lost-2.2m-in-a-share-fraud.html

Divorce is a financial catastrophe

How to prevent 'I do' turning into 'I don't'
Divorce is a financial catastrophe and some couples are more at risk than others. A leading lawyer explains why 'pre-nups' may have a role to play.

By Jane Keir
Last Updated: 3:26PM BST 18 Apr 2009

The Office for National Statistics (ONS) tells us that in 2007 the average age of those divorcing in England and Wales was nearly 44 for men and just over 41 for women. What really catches the eye, however, is that, of those divorces, one in five had a previous marriage end in divorce – a proportion that has doubled since 1980.

So why are second marriages more vulnerable? The answer may lie in trying to align emotional and romantic expectations for one another, while at the same time recognising the financial needs, responsibilities and priorities with regard to the children of each previous relationship.

Children who may already have experienced the seismic upheaval of the separation and divorce of their parents may now dread and therefore oppose, consciously or otherwise, the refocusing of the attention and love of one or both of their parents on a newcomer.

Parents will usually strive to ensure that the development of a new relationship moves at a pace with which the children can cope, but they often overlook the financial consequences of remarriage.

EXAMPLES OF POTENTIAL COMPLICATIONS

1. When a father is committed to funding the full cost of private education for his children in circumstances where they may still have several years to go before the end of secondary education and whose second wife-to-be has similar aspirations, but not the financial means, for her children who are living with them.

2. When a couple, whose children are older and no longer living at home, both have their own properties and she invites him to move in with her, sell his property and live off of the sale proceeds.

The prospects arising from the situations above may be enough to put the brakes on remarriage or lead to very substantial reluctance perhaps to even live together, unless there is good – and even brave – communication between them so they can talk through their concerns.

Family law is not all about divorce and separation. Many solicitors are spending an increasing amount of time looking at premarital contracts (more commonly known as ''pre-nups'') which are often given a hard time in the media as being "unromantic'' and viewed as some sort of self-fulfilling prophecy.

The reality is that the preparation of such a contract requires a couple to sit down and take a long, hard look at what they have in the way of financial resources and how they should organise them. For those marrying for a second time such an exercise – not necessarily negotiating a premarital contract, but talking together about what they both have and what they want to achieve – may take away a lot of the heartache, angst and even mistrust that builds up where there is a problem, but no willingness or even ability to talk about it.

Take the father in example one who wishes to preserve a large part of his income to pay school fees. The couple might find out that, by combining their respective resources and running one household rather than two, that it is possible. They might also agree that, were he to die before the children finish school, then he will nominate some part of his death in service benefits to ensure that there is sufficient in the pot to enable the rest of the school fees to be paid. Thus, in the event of his early death, his second wife knows exactly where she stands and there is no danger of expensive and stressful litigation with the "first family''.

In example two, the couple may agree to transfer the wife's property into joint names after they marry (but not necessarily into equal shares if her property is worth considerably more than his) and to prepare new wills. The preparation of new wills not only addresses the question of who gets what upon death but also, like the work that goes into the preparation of a premarital contract, it requires both parties to take a considered look at their respective finances and to work out what they want to happen.

The added advantage to the process is that they may well discover that there are steps they can be taking now to maximise and protect their wealth, for example, by using their lifetime allowances and rebalancing the risk of both inheritance tax and capital gains tax (CGT) liabilities. Or they might agree to rent out his property, so that they can enjoy the income it generates (albeit that the rent is likely to be subject to income tax and possibly a charge to CGT if sold during his lifetime, so that they may still need to review whether she should give him a share in her property).

The preparation of new wills may also help to mollify older children concerned at the prospect of "their'' inheritance moving away from them to a new stepmother/father. Of course, children have no absolute right to inherit in England and Wales – in contrast to some other European jurisdictions – as apart from an obligation to provide for "dependants'' – that is, people financially dependant on a person at the time of his death – anyone may leave his estate to whomever or whatever he likes, or spend it all entirely in his lifetime.

Jane Keir is a partner and head of family law at Kingsley Napley

http://www.telegraph.co.uk/finance/personalfinance/consumertips/5178027/How-to-prevent-I-do-turning-into-I-dont.html

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