VALUATION OF CLOSELY HELD COMPANIES First Run Broadcast: May 2, 2018 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Virtually every transaction of a closely held company requires a valuation. The company may be selling itself or some of its assets; obtaining a loan or placing equity with new investors; its owners may be engaged in a buy/sell transaction; or estate planners may need it for planning purposes. But valuing a closely held company is much art as science because there is no regular and liquid market matching buyers and sellers. This makes valuation highly contentious as parties argue over add-backs, discounts and premiums, and how to “price” cash flow or earnings. This places significant pressure on transactional attorneys to understand the many intricacies of valuation. And all the familiar calculations have been altered by the new tax law. This program will provide you a real-world guide to valuation methodologies, how the purpose of the valuation effects the outcome, common points of contention, and drafting tips to avoid costly disputes. • Closely held company and asset valuation and drafting issues for transactional lawyers • Impact of new tax law on closely held company valuation • How purpose of valuation impacts the valuation • Valuation methodologies depending on the type of business or asset – asset-based, cash flow, market comparables, and intrinsic value • Costly valuation mistakes and how to reduce risk of dispute • Valuation premiums and discounts – “fair market value” and “fair value” • How valuations are actually derived – objective factors v. professional judgment Speaker: Ronald L. Seigneur is a partner in Seigneur Gustafson LLP, a CPA firm located in Lakewood, Colorado, where he provides valuation, tax and retirement planning, and litigation support services. He has published over 80 articles on business valuation and is co-author of “Financial Valuation: Applications and Models,” (2 nd Ed.), a treatise on business valuation published by John Wiley & Sons. He is a Certified Valuation Analyst with the National Association of Certified Valuation Analysts (NACVA) and holds the American Institute of Certified Public Accountants’ specialty designation of Accredited in Business Valuation. He is an Adjunct Professor of Law at the University of Denver College of Law, where he teaches financial, management and leadership courses. Mr. Seigneur earned his B.A. from Michigan State University and a MBA from the University of Michigan.
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Virtually every transaction of a closely held company requires a valuation. The company may be
selling itself or some of its assets; obtaining a loan or placing equity with new investors; its
owners may be engaged in a buy/sell transaction; or estate planners may need it for planning
purposes. But valuing a closely held company is much art as science because there is no regular
and liquid market matching buyers and sellers. This makes valuation highly contentious as
parties argue over add-backs, discounts and premiums, and how to “price” cash flow or earnings.
This places significant pressure on transactional attorneys to understand the many intricacies of
valuation. And all the familiar calculations have been altered by the new tax law. This program
will provide you a real-world guide to valuation methodologies, how the purpose of the valuation
effects the outcome, common points of contention, and drafting tips to avoid costly disputes.
• Closely held company and asset valuation and drafting issues for transactional lawyers
• Impact of new tax law on closely held company valuation
• How purpose of valuation impacts the valuation
• Valuation methodologies depending on the type of business or asset – asset-based, cash
flow, market comparables, and intrinsic value
• Costly valuation mistakes and how to reduce risk of dispute
• Valuation premiums and discounts – “fair market value” and “fair value”
• How valuations are actually derived – objective factors v. professional judgment
Speaker:
Ronald L. Seigneur is a partner in Seigneur Gustafson LLP, a CPA firm located in Lakewood,
Colorado, where he provides valuation, tax and retirement planning, and litigation support
services. He has published over 80 articles on business valuation and is co-author of “Financial
Valuation: Applications and Models,” (2nd Ed.), a treatise on business valuation published by
John Wiley & Sons. He is a Certified Valuation Analyst with the National Association of
Certified Valuation Analysts (NACVA) and holds the American Institute of Certified Public
Accountants’ specialty designation of Accredited in Business Valuation. He is an Adjunct
Professor of Law at the University of Denver College of Law, where he teaches financial,
management and leadership courses. Mr. Seigneur earned his B.A. from Michigan State
University and a MBA from the University of Michigan.
VT Bar Association Continuing Legal Education Registration Form
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Valuation of Closely Held Companies Teleseminar May 2, 2018
1:00PM – 2:00PM 1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
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Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: May 2, 2018 Seminar Title: Valuation of Closely Held Companies Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
Navigating The New Tax Law: Implications for Business Appraisal
It is my normal practice to provide as much material as I can for the attendees. As a result I might not cover every slide included in the presentation. If the slides I do not cover in detail raise questions in your mind, please feel free to either catch me after the presentation or send me an email and I will answer your question.
• A specified service business means any business activity involving the performance of services by employees or owners in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset of such business is the reputation or skill of one or more of its employees.
• Architecture and engineering were specifically omitted
• Included are the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
TCJA’s Impact on Cash Flow Dependent Methods of Valuation Will be Substantial
• After-tax GAAP income will likely increase for many businesses…but what will be management’s intentions for the increased income? What will be the impact on cash flow?
• Alimony payments will no longer be deductible by the payor spouse nor will they be includible in the income of the payee spouse.
• Effective date: applies to any divorce or separation instrument as defined in §71(b)(2) executed: • after December 31, 2018, or • before December 31, 2018, and modified after that date, if the modification
expressly provides that these amendments made by the Act apply to such modification
• before December 31, 2018 but have been substantially modified after December 31, 2018
Impact of New Alimony Rules Settling cases just got a lot harder… • Note: Change was made primarily to make Alimony a revenue neutral
item for the government/IRS (at the expense of divorcing taxpayer).
• New rules will cost divorcing taxpayers more (overall) out of pocket unless alimony is reduced for value of tax deductions
• Change could have a dramatic impact on every divorce in negotiation now or during 2018.
• New rules may decrease the bargaining power of recipient’s as payor's are unwilling to pay as much knowing the payment is not deductible…the psychology of paying alimony will totally change!
• When this change becomes effective, it will change the landscape for all future divorces in ways that may not be readily determined.
Family Law Practitioner Considerations Agreements in Process • Every divorce agreement, prenuptial agreement and post-nuptial agreement
in process should address the consequences of the new law, and should be completed prior to the effective date of the new provision if that is preferable, and contemplate the possible change by future legislation.
• Add provisions to any agreement in process that if the law is changed as provided in the Act, the agreement can or must be renegotiated (or expressly provide that there will be no renegotiation even if the future amendments to the tax law change the tax effects of payments to be made under the agreement).
• Specify in agreements being negotiated before 2019 both the alimony payment amount under the existing law pre-2019 when it can be deducted and the alimony payment amount under the Act in the event the agreement is not concluded in time.
• Family law practitioners and accountants should put all divorced clients paying or receiving alimony on notice that the agreement lawfully may be modified to bring it under the new law if that proves advantageous for them.
• Prior Pre/Post Nup Agreements - review agreements and address prior alimony provisions and whether to proactively enter into a postnuptial agreement in order to confront the issue.
Is the tax law change considered a substantial modification in circumstances warranting support modifications??
Family Law Practitioner Considerations Future possibility of repeal or changes
• What will happen, should that occur, to property settlement agreements that are executed while the alimony deduction was eliminated?
• Should matrimonial practitioners risk complicating the divorce agreement more by trying to contemplate the possibility of future legislative change at a time when the sea-change of nondeductible alimony has not yet been digested?
• If an agreement to renegotiate the provision if the law changes is included, what will be the consequences?
• If the agreement provides for the renegotiation of the alimony provision, when it comes time to do so, will it open the floodgate to renegotiate other nonrelated terms in order to get the deal done?
1. Transfer additional retirement assets at pre-tax values as part of property settlement in lieu of alimony
Recipient pays income tax on distributions - if under age 59 1/2:
• QDRO distributions are not subject to 10% early withdrawal penalty
• IRA distributions can be annuitized under Sec 72(t) to avoid 10% penalty
If payer owns business, consider new cash balance or other aggressive funding plans to replenish retirement accounts and receive current tax deductions on contributions
• Prior divorce agreements most likely failed to include provisions requiring that 529 funds be reserved for payment of college expenses so the use of 529 funds now for elementary or high school could undermine original divorce agreements and dissipate college funds. • non-title owner should exercise any rights he or she may have to review the
account statements to track how the funds are being spent and to consult with his or her lawyer about taking action to address the issue before it may be too late to prevent dissipation of the funds
Impact of 529 Plan Changes • What happens if the divorce agreement is silent or ambiguous as to
the application of the 529 funds?
• What if one ex-spouse was obligated to pay for private pre-college education and the agreement is not clear on limiting 529 plans for college? • Can that spouse distribute funds from a 529 plan to pay his or her obligations
for elementary school? • What if that dissipates the funds intended for college?
• Review existing divorce agreements in order to ascertain whether the agreement specified college-only expenses be paid from a 529 plan and whether that would suffice to restrict the spouse account owner from using funds earlier.
Types of Qualified Residence Interest (QRI) 1. Qualified Acquisition Indebtedness (QAI) – debt secured by the home and
incurred to buy, build, or remodel that home 2. Home Equity Indebtedness (HEI) – debt secured by the home but not necessarily
incurred to buy, build, or remodel that home • HEI allowed for any purpose: payoff credit cards, college/education, buy a car, etc. • Note: Remodeling costs funded by HEI considered QAI if the remodel was on that home and
HEI if done on another home
QRI deduction limits 1. Interest on QAI up to $1,000,000 for primary and secondary homes (combined) 2. Interest on HEI up to $100,000 for primary and secondary homes (combined) Therefore, interest from up to $1,100,000 of debt secured by homes could be deductible
Mortgage Interest Changes (con't) New Law: Effective Date
• Applies to new acquisition debt incurred on or before December 15, 2017 • Exception: For a taxpayer who entered into a written binding contract before Dec. 15,
2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchased that residence before Apr. 1, 2018, the old law applies
Types of Personal Residence Debt 1. Qualified Acquisition Indebtedness (QAI) – debt secured by the home and incurred to
buy, build, or remodel that home (no change in QAI definition) 2. Home Equity Indebtedness (HEI) – not deductible except QAI qualifying portion
Qualified Residence Interest (QRI) deduction limitations Interest on QAI up to $750,000 for primary and secondary homes (combined) • includes mortgage and HELOC balances used to buy, build, or remodel the home secured
Transition Rules • The interest on up to $1,000,000 QAI for principal and second residence
mortgages (combined) continues to be deductible for existing mortgages at December 15, 2017.
• Existing mortgages can be refinanced and the interest can continue to be deductible. • In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced
indebtedness shall be treated as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
• Refinanced balance and equity taken/additional funds used to remodel that home
• After 2017, HELOC interest related to non-QAI purposes will no longer be deductible
Impact of Mortgage Interest Changes • Refinancing of mortgages and HELOCs are very common in divorce
• For future tracking purposes, the party retaining the home and related debt(s) should obtain the following records: • Identify all mortgage and HELOC balances as of 12/15/2017 and breakdown by
• QAI Mortgage balances • QAI HELOC balances – funds used to buy, build, or remodel the home securing that HELOC • HEI HELOC balances – funds NOT used to buy, build, or remodel the home securing that HELOC
• If existing mortgages are refinanced and mortgage debt is increased, breakdown the newly refinanced debt balance by • Portion related to QAI mortgages in place at 12/15/2017 • Portion related to QAI mortgages on new acquisitions after 12/15/2017 • Portion of new debt related to QAI (remodeling/home improvements) • Portion of new debt related to Non-QAI purposes (other personal uses)
Kiddie Tax Changes Old Law: Unearned income over $2,100 of a dependent child under age 24 was subject to tax at parent’s tax rates
New Law:
• TC JA taxes a dependent child’s earned income at tax rates for single individuals and taxes unearned income over $2,100 at trust and estate tax rates
• Favorable capital gain and dividend tax rates apply
• The top tax bracket starts at $12,500 of taxable income for estates and trusts
• Dependent child standard deduction is $250 plus earned income up to the maximum single standard deduction ($12,000 for 2018)
• Children subject to the Kiddie Tax will now file separate tax returns (not included on parents return)
• If investment income or activity is down on the parents’ tax returns, consider requesting children’s tax returns or inquire about new trusts to see if investments have been shifted recently