Presenting a live 90-minute webinar with interactive Q&A Divorce and Business Valuations Navigating Complex Valuation Issues and Methodologies and Analyzing Valuation Impact on Support THURS DAY, MARCH 15, 2012 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Gunnar J. Git lin, At t y, The Gitlin Law Firm , Woodst ock, Ill. Mart in S . Varon, Principal, Alternative Resolution Methods , At lant a S arah McCormack, Part ner, Kessler & Solomiany , At lant a Daniel E. Clement , At t y, Clement Law , New Y ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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VALUATION DISCOUNT S AND ENTERPRISE VERSUS PERSONAL GOODWILL Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL 815-338-9401 gjg@gitlinlawfirm.com www.GitlinLawFirm.com
In divorce valuations, often a significant issue is not value of the business, itself, but the discounts applied to the value. The main discounts to be reviewed are: Minority Interest (Control Premium) and Lack of Marketability . Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 6
Will learn how to analyze all of the key discounts and premiums: Includes critical issues: Key Revenue Rulings Discounts and Premiums 101/102. Control Premiums/Minority Interest Discounts Lack of Marketability Discounts Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 7
Revenue Ruling 59-60: Little discussion of discounts. Does address key person discount issue – discussed later. Revenue Ruling 77-287: Early Revenue Ruling addressing lack of marketability discounts. Revenue Ruling 93-12: Revenue Ruling doing away with so called “family attribution doctrine” previously promoted by I.R.S. Allows application of minority interest discounts to partial transfers even when a family owns overall control of a closely-held business. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 8
Revenue Ruling 59-60 : Little discussion of discounts. Does address key person discount issue – discussed later. Revenue Ruling 77-287 : Early Revenue Ruling addressing lack of marketability discounts. Revenue Ruling 93-12 : Revenue Ruling doing away with so called “family attribution doctrine” previously promoted by I.R.S. Allows application of minority interest discounts to partial transfers even when a family owns overall control of a closely-held business. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 9
Key Concept is relationship between nature of ownership interest from marketable, controlling interest to non- controlling, non-marketable interest upon valuation discount. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 10
Obtain indirectly by reference to S TRATEGIC V ALUE control values via strategic premium Strategic Premium/Merger Economics Obtain indirectly by reference to freely C ONTROL V ALUE traded values via control premium Premium for Control Lack of Control Discount F REELY T RADED V ALUE OR Obtain indirectly by reference to control M ARKETABLE , values via lack of control discount N ON -C ONTROLLING Lack of Marketability Discount Obtain indirectly by reference to freely N ON -M ARKETABLE , traded values via lack of marketability N ON -C ONTROLLING discount Source: Based on Z. Christopher Mercer, "Understanding and Quantifying Control Premiums: The Value of Control vs. Synergies of Strategic Advantages, Part II," The Journal of Business Valuation , p.51. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 11
Type of Valuation Illustrative Illustrative Ownership Premium / Impact Premium / Example on Value Interest Discount % Discount Marketable 100% interest Synergistic for sale to a Premium Control +15% $115 strategic buyer (Not FMV) Marketable 100% interest No Discount for sale to any or Premium Control None $100 willing buyer Marketable Minority Discount for Noncontrol interest in a Lack of -20% $ 80 publicly traded Control company Nonmarketable Minority Discounts for interest in a Lack of Noncontrol -30% $ 56 private Control and company Marketability Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 12
Control Premium: Additional consideration investor would pay over a marketable, minority equity value (publicly traded stock prices) to own a controlling interest in the common stock of a company. Premium may include components for control and synergy. Lack of Control Discount (a.k.a. Minority Discount): 50% interest may have lack of control discount although not a minority interest. Neither control nor minority position. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 13
“There are 51 shares ... that are worth $250,000. There are 49 shares that are not worth a ----.” (See Humphrys v. Winous Co., 133 N.E.2d 780, 783 (Ohio Sup. Ct. 1956) quoting from John H. Doyle, speech before Ohio State Bar Association, July 1893). Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 14
Control versus minority interest not an all or nothing concept. Examples: Set corporate policy; Appoint management; Determine compensation for management; Determine perqs of management; Acquire or liquidate corporate assets; Declare and pay dividends; etc. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 15
100% Control. Slightly Less than 100% Control : Minority interest may be a nuisance. Less than 80% control: Cannot consolidate financial statements for tax purposes. Two-Third Interest: About one-third of the states require more than a 50% (plus one share) vote to approve certain major corporation actions (see chart in written materials). This may be known as super-majority. The various states’ statutory positions on this issue will have an affect on the degree of control. 50% Interest: This interest is neither a control nor minority position. Such a shareholder has the power prevent actions but generally does not have the authority to control action of the company. Swing Vote - Minority block: This depends upon the distribution of the stock. The relationship between the persons owning other stock may have a value on the swing vote. Example: 1/3 int. to three owners subject to lesser discount. Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 16
Attempt to indirectly examine the range of premiums buyers pay for a controlling interest in a public company. Two Sources of Data – Compare public market trading prices before announcement of a merger or acquisition to the merger or acquisition price: Mergerstat Review: Publishes annual average control premiums for about 50 broad industry groups. These are averages and exclude negative premiums (takeovers at discounts from previous publicly traded prices). Mergerstat/Shannon Pratt’s Control Premium Study Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL: www.GitlinLawFirm.com 17
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