Knoxville Family Law Conference

1. Presented by: W. James Lloyd, CPA/ABV, ASA, CFE Knoxville Family Law Conference October 22, 2010 Valuing Privately Held Businesses for Divorce

3. Agenda Page

14. Balance Sheet Analysis Page Cash should be enough but not too much! Accounts Receivable Inventory Fixed Assets Accrued Expenses Debt Obligations collectability consider obsolete and slow moving “ in-use” vs. resale value sometimes aren’t recorded use of funds and repayment terms

19. Adjustments for Lack of Control Adjustments/discounts for lack of control (DLOC) are used to adjust “control” level indications of value (i.e. determined from control level cash flows) to minority level value indications DLOC are generally based on benchmark data plus qualitative analysis Note: the DLOC adjustment should be reasonable under the circumstances (e.g. would someone likely pay an implied premium for a controlling interest in the subject company?) Page

20. Adjustments for Lack of Marketability Adjustments/discounts for lack of marketability (DLOM) are used to adjust indications of value to a cash equivalent basis Multiple methods available to determine benchmark discounts – several of which are controversial Analysis generally includes both qualitative and qualitative factors Resulting value should be reasonable under the circumstances Page

22. Enterprise vs. Personal Goodwill Page Enterprise goodwill is part of the business and should be included in the entity’s value Personal goodwill is an individual asset and (generally) should not be included in the entity’s value

23. Separating Personal Goodwill Personal goodwill can be separated by normalizing compensation and/or performing a “with and without” analysis Primary Reason – Avoiding the “double dip” between business value and the individual’s earnings capacity Page

26. Valuation Organizations and Credentials Page The most common business valuation organizations and credentials include: American Institute of CPAs Accredited in Business Valuation (“ABV”) credential American Society of Appraisers Accredited Senior Appraiser (“ASA”) credential Institute of Business Appraisers Certified Business Appraiser (“CBA”)

28. Forensic Accounting Issues Page

29. Fraud Defined Page

30. Fraud Triangle Page Culture or environment enables management or other employees to rationalize committing fraud Circumstances exist – ineffective or absent control, or management ability to override controls – that provide opportunity Management or other employees have an incentive or are under pressure INCENTIVE RATIONALIZE FRAUD OPPORTUNITY

31. The Need for Forensic Accounting Page

33. Divorce Engagements Page

34. What To Look For Page

35. Red Flags Page

36. Red Flags Standard of living is unusual relative to known financial resources Disorganized operations Poor internal controls – easy for management to override Unusual and/or unsupported journal entries Out of balance subsidiary ledgers Page

37. Red Flags Unusually consistent financial performance Disconnect between cash and profitability Financial results that are in substantial contrast to other relevant factors such as economic conditions, peer groups, etc. Page

38. How to Find It – Basic Preliminary Steps Page Determine that proper predication has been established by the client Obtain an understanding of the specific fraud suspicions or allegations by discussing the case with client/attorney and review any work already performed Start gathering and analyzing data

39. Gathering and Analyzing Data Page Relevant data is generally gathered from a combination of methods such as: Obtaining and reviewing documents - from client and/or other sources Personal interviews Observations Background investigations Public record inquiries

40. Reviewing Documents – Caution Page Data should be gathered/analyzed with a high degree of skepticism Falsified documents are often used in collusion with others in an effort to conceal the fraud Proper chain of records custody may become an issue especially if documents have been altered or falsified

41. Analytical Procedures Look for unusual or unexplained trends: Year-to-year comparisons of financial data Benchmark comparisons Analytical procedures can be useful for purposes of identifying potential problem areas Page

42. Data Mining Page