Case Studies

The proof of the pudding is in the eating…

Fact Pattern -

Ken was going through a divorce and facing a financial predicament. When he and Barb had married 10 years earlier, they’d each brought separate property assets into the marriage. At the time of marriage, Ken had owned a controlling interest in a company that manufactured desserts and Barb had sizeable investments in various money market accounts and stock portfolios. During the period of marriage, the company had grown significantly, in large part due to Ken’s efforts and to cash infusions from Barb’s separate property. Further, Barb had frequently transferred funds between her separate property accounts and various community accounts during the marriage. Now that Ken and Barb were going through the divorce process, they needed a tracing of funds to ascertain the extent to which Barb’s separate property holdings had been comingled with community funds. They also needed to determine the value of the community’s interest in the dessert company.

Important Considerations –

In a situation such as this one, it may be necessary for a forensic accountant to trace the funds that were transferred between community and separate property sources. Such an analysis should ultimately determine the extent to which commingling has occurred and provide a reasonably supported methodology for apportioning the relative accounts between community and separate property. Since the value of the dessert company increased during the marriage as a result of both community effort and separate property contributions, the portion of the business value that is attributable to the community will require analysis of Ken’s reasonable compensation, an understanding of the drivers behind the company’s growth, and a reasoned assessment of the usefulness of cash infusions received from Barb’s separate property funds.

For more information regarding forensic accounting please visit the Anthem Services page or contact us for assistance with a specific forensic accounting issue.

Building a business, then breaking it down…

Fact Pattern -

Diane had been extremely pleased when she first joined forces with Jack. His background in construction management, coupled with her engineering background and contacts, had driven their business to become a major contender in their niche industry. Unfortunately, in recent years Jack had made what Diane considered to be increasingly erratic business decisions. Since Jack was the controlling shareholder and the corporate agreements were poorly constructed, Diane had little recourse when she disagreed with his decisions. As the company’s profits were now in a free-fall, Diane was faced with mounting pressure to either stay with the company, taking her chances with an increasingly despondent Jack, or evaluate other alternatives.

Important Considerations –

In a situation such as this one, if Diane were to consider leaving the company, she would be faced with either selling her interest back to the company, through buy-out provisions in the corporate agreements, selling her interest to an outside party, if the corporate agreements allowed such a sale, or seeking relief as a dissenting shareholder, taking advantage of relief provided by state statutes. In all three of these alternatives, Diane would need to determine the relative worth of her business interest. Since the value of a business interest depends upon the overall assumptions used in its determination, which assumptions are generally referred to as “standards of value”, it is imperative that Diane understand the applicable standards and the extent to which they may apply.

For example, the buy-out provisions may require that the interest be valued under “fair market value” standard of value, which typically assumes a hypothetical sale of the business interest. In the alternative, if the corporate agreements allowed her to sell her interest to an outside party, she may want to value the interest under the “investment value” standard of value, which can take into consideration a specific buyer and any synergies that might flow to that specific buyer upon their acquisition of her interest. Then again, if Diane seeks relief under dissenting shareholder statutes, she may need to have her business interest valued under the “fair value” standard of value, which might preclude certain transaction discounts that might otherwise apply.

For more information regarding business valuation please visit the Anthem Services page or contact us for assistance with a specific business valuation issue.

When the road hits back…

Fact Pattern –

The transportation company, Be There, was between a rock and a hard place. The company’s largest customer was an R&D facility that had very specific transportation needs. In order to meet these needs, Be There had a highly customized fleet of vehicles. Unfortunately, this customization came at a price, as the company was significantly reliant upon a fabrication company for many of its customization needs. The fabrication company had recently been taken over by new management, which new management had decided to go into direct competition with Be There, despite non-competition agreements between the two companies. As part of this new playing field, the fabrication company had completely stopped servicing Be There, and had indicated that it would no longer honor any of its contractual relationships with the transportation company.

Important Considerations –

In most situations wherein economic damages must be calculated, it is important to understand the causal nexus that connects certain damaging events (in this case, the fabrication company’s breach of contract) to certain alleged damages (in this case, Be There’s lost profits based upon the breach of contract). While attorneys address the attendant liability issues, it is within the financial expert’s realm of expertise to determine the financial extent to which economic damages can be traced and quantified from the alleged events to the alleged impairments.

By way of example, Be There’s lost profits in this situation may include profits lost because of capacity limitations given its current fleet and the knowledge that specialized vehicles might not be procurable from other than the fabrication company. The lost profits may also include the destruction of the entire Be There business if the potential loss of its largest customer, the R&D facility, irreparably destroys Be There’s operations. Incumbent within these observations are other considerations, such as mitigation, or the extent to which Be There might have been able to reduce its alleged lost profits. Ultimately, the financial expert must address these issues adroitly, while also avoiding the pitfalls that often encumber such analyses.

For more information regarding the calculation of economic damages please visit the Anthem Services page or contact us for assistance with a specific issue relative to the calculation of economic damages.