Citrin Cooperman”™s Gary Karlitz, partner-in-charge of forensic accounting, has seen a rise in the number of business valuations conducted by his firm because of factors ranging from disputes to gifting. Here are edited excerpts of our conversation:
Business valuations ”“ or pricing out your interest in a company ”“ are up. Why?
Karlitz: “Citrin Cooperman”™s valuation and forensic services saw a 20 percent increase over the course of eight months ending August 31, 2011, compared to the same period in 2010. There are three major reasons why. First, disputes are on the rise. People have the money to fund the litigation, but are still being very careful. In years past, they didn”™t have the money. They said, ”˜I have to live with this partner, I can”™t sue my partner, I don”™t have the money to get divorced.”™ Second, it”™s a gift tax perfect storm. Thirdly, fair value measurements under Generally Accepted Accounting Principles (GAAP) are on the rise due to the GAAP requirement to test for goodwill impairment under ASC 820 (formerly FAS 142). As you can imagine in this sustained economic downturn, there is a lot of goodwill impairment.”
Q: What”™s one of the challenges of thwarting any fear or unrest in clients when a merger or dissolution occurs?
Karlitz: “In these situations, sometimes there are disgruntled shareholders. In family businesses, brothers and sisters are great examples of this. A father can run a wholesale distributor and if a sister is not involved but has, for instance, a knowledgeable husband who says, ”˜You”™re not getting your fair share,” they file a derivative action. It”™s disgruntled shareholders demanding that the corporation take action against its own shareholders or directors for economically harming the corporation. There may be, for instance, a brother accused of taking too many perks or directing sales to another entity or stolen shares, so often there is a civil court case. When you think of forensic or ”˜fraud”™ auditing, there are people with specialized training who learn how to look at computer data to see if things are going awry, and it can be costly.”
Q: What”™s typically evaluated in a business valuation?
Karlitz: “True economic income, expected long-term sustainable growth of that income and the risk associated with the income. If I am valuing a company where there is some question as to whether everybody”™s playing fairly, I don”™t just take the true economic income off tax returns and adjust it. I”™d interpret it the way a hypothetical fair market buyer and seller would evaluate it. If it”™s (a family business) and a daughter thinks the brother is raping the business, the true economic income really has to be scrutinized and that”™s when you would perform a forensic investigation, which often creates this derivative claim action.”
