By Lance Wallach, CLU, CHFC, Carl L Sheeler
Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness
Call Lance Wallach, at (516) 938-5007
Call Lance Wallach, at (516) 938-5007
Received your ABV certification. Check. Or your CVA certification. Check. Pulling down an extra $20,000 to $50,000 for the firm. Check. Performing 2 to 4 formal reports annually. Check. And you now have five years under your belt with 20 or so reports completed and while you haven’t memorized AICPA’s SSVS-1, you know it addresses valuation standards applicable to CPAs. Check. Check.
So, why is your former $50,000 annual billings $20 million annual sales metal fabrication client the firm has been serving for the past decade suing your firm and you for $4 million plus damages and your E&O insurer has declined coverage?
Let’s visit the fourth engagement you completed a few years back. Remember you thought since you had some industry data for your comparative analysis you were fine. You were using the valuation report writer, so fine here, too. You used one of the better priced transactional data sources, so good there, too. After all, you are designated and have thousands of hours doing compilation work for business owners just like the metal fabrication company. That is solid experience you tell yourself.
So, what happened? Why the cold sweats? Your bio at the company website represented you were a seasoned valuator. That’s true…. Or is it? Most professions tend to use the 10,000 hours of full-time experience as a benchmark for the partner track. Some valuation organizations do, too.
Counsel for your former client retained, affable valuation expert, Theodore Rexnard. His clients call him T. Rex. He’s your worst nightmare. He just eviscerated your valuation report and now counsel has you by the shorthairs. He started matter-of-factly and indicated your report had no market analysis and weighted prior years’ performance even though the trend was downward for the last three years. He pointed out that there were three other comparative industry databases, which you did not use and there was only 14 companies that made up the sample set for your analysis, so the officer’s compensation adjustment was off by 400 basis points. He then indicated your guesstimate for the fabricator’s equipment’s value was beyond the scope of your training. He indicated you misapplied the excess earnings method, which should not have been applied at all because the equity to be valued was a minority interest and this method assumes a controlling one. You applied the median multiples of the one data source you had of closely held transactions. Problem is the Subject company performance was way below the median performance and the last of the transactions occurred in 2007; yet, no time adjustments were made for your 2010 date of value. Let’s just say you took averages from the discount studies without tying in the company’s performance, holding period or investor expected return.
So, the computer generated report looked pretty good. Check. Client doesn’t know what good looks like and happily paid the $12,000 fee. After all he trusted you and your firm. Too bad the value was $4 million below the value you represented it was “In your professional opinion".
This scenario is real and the CPA’s career prospects came to a screeching halt - a common epitaph. Let it be a caution to those who prey on the ignorance of unsuspecting clients there is likely to come a time that the distorted truth will come back and bite. Hard. Or you can refer business valuation work to competent professionals who perform BV services full-time. Clients win. So do you. And, no nightmare!
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
ABOUT THE AUTHOR: Lance Wallach,
Lance Wallach, National Society of Accountants Speaker of the Year and Member of the AICPA faculty of teaching professionals, is a frequent Speaker on retirement plans, abusive tax shelters, financial, international tax and estate planning.
Let’s visit the fourth engagement you completed a few years back. Remember you thought since you had some industry data for your comparative analysis you were fine. You were using the valuation report writer, so fine here, too. You used one of the better priced transactional data sources, so good there, too. After all, you are designated and have thousands of hours doing compilation work for business owners just like the metal fabrication company. That is solid experience you tell yourself.
So, what happened? Why the cold sweats? Your bio at the company website represented you were a seasoned valuator. That’s true…. Or is it? Most professions tend to use the 10,000 hours of full-time experience as a benchmark for the partner track. Some valuation organizations do, too.
Counsel for your former client retained, affable valuation expert, Theodore Rexnard. His clients call him T. Rex. He’s your worst nightmare. He just eviscerated your valuation report and now counsel has you by the shorthairs. He started matter-of-factly and indicated your report had no market analysis and weighted prior years’ performance even though the trend was downward for the last three years. He pointed out that there were three other comparative industry databases, which you did not use and there was only 14 companies that made up the sample set for your analysis, so the officer’s compensation adjustment was off by 400 basis points. He then indicated your guesstimate for the fabricator’s equipment’s value was beyond the scope of your training. He indicated you misapplied the excess earnings method, which should not have been applied at all because the equity to be valued was a minority interest and this method assumes a controlling one. You applied the median multiples of the one data source you had of closely held transactions. Problem is the Subject company performance was way below the median performance and the last of the transactions occurred in 2007; yet, no time adjustments were made for your 2010 date of value. Let’s just say you took averages from the discount studies without tying in the company’s performance, holding period or investor expected return.
So, the computer generated report looked pretty good. Check. Client doesn’t know what good looks like and happily paid the $12,000 fee. After all he trusted you and your firm. Too bad the value was $4 million below the value you represented it was “In your professional opinion".
This scenario is real and the CPA’s career prospects came to a screeching halt - a common epitaph. Let it be a caution to those who prey on the ignorance of unsuspecting clients there is likely to come a time that the distorted truth will come back and bite. Hard. Or you can refer business valuation work to competent professionals who perform BV services full-time. Clients win. So do you. And, no nightmare!
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
ABOUT THE AUTHOR: Lance Wallach,
Lance Wallach, National Society of Accountants Speaker of the Year and Member of the AICPA faculty of teaching professionals, is a frequent Speaker on retirement plans, abusive tax shelters, financial, international tax and estate planning.
Carl L Sheeler, PhD, ASA, CBA, AVA, A 20+ year business valuation expert, former Marine officer and Ph.D. (Finance) having performed 900+ high profile litigation, business appraisal, fairness opinions & restructuring engagements for legal, tax & transfer purposes for family businesses and midmarket companies. An IRS/Court qualified business appraiser serving hundreds of advisors, family offices, ESOPs, private equity groups & business owners in measuring, creating & defending $5.2+ Billion in company value.
Copyright Lance Wallach, CLU, CHFC
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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
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