The almost 76 million baby boomers (those born from 1946-1964, now aged 52-70 years old) have been impacting the American economy for several decades and likely will continue to be a major influence into the next two decades. The baby boomers are a generation of entrepreneurs. More businesses were founded and grown by this generation than any other.
Retiring baby boomer business owners will sell or hand down several trillion dollars’ worth of assets over the next two decades, held in millions of privately held businesses. Almost three-quarters of these companies are expected to change hands.
The millions of businesses expected to change hands over the next decade or two will likely include a significant number of baby boomer to baby boomer transactions. Many boomers feel they are too young to retire, have sufficient resources from savings, investments or other assets, and have accumulated skills through years of experience. The last recession, layoffs and restructurings left many feeling as though they have more to offer in their careers. Small business ownership is often seen as more safe and secure than working for a large company.
As a result of these circumstances, over the next two decades, we are likely to see a significant increase in the number of small and mid-sized businesses being sold and bought by baby boomers, as well as Generation Xers (1965-1976) and Millennials (born 1977-1993).
If you are a baby boomer business owner, what is your exit strategy relating to your business? Approximately one-third of business owners will transfer their family business to the next generation, hopefully poised and prepared to manage their businesses. The other two-thirds will have to make other plans, perhaps one of the following options:
- Run their businesses into their retirement years, potentially leaving it to be settled during probate of their estates;
- Dissolve their businesses in the event capable management is not in place when they wish to retire;
- Sell their businesses to qualified buyers, providing them with sufficient financial resources for their retirement and, possibly, for their heirs.
If you choose the last option, you first need to know what that business is worth. Estimating the fair market value of your business should be done by an experienced professional. Once you have determined what your company is worth, you can make decisions and choose your next steps fully informed. A business valuation will allow you to better understand value drivers specific to your business and the industry and markets in which it operates. If the fair market value is less than you expected, you can make plans to strategically improve your business to increase its value in anticipation of its future sale. Timing is important in the sale of a business.
For retirement planning of a small business owner, especially baby boomers for whom retirement could be right around the corner, the starting point in all of this should be a business valuation. Another essential step is to contact a financial advisor that can best help you establish and achieve your retirement and estate planning goals.
For help in determining the value of your business, the Forensic and Business Valuation Services Group at Berkowitz Pollack Brant will be glad to help you. Call 305-379-7000 or email email@example.com for more information. For information about the services offered by the trusted team of financial advisors at our affiliate, Provenance Wealth Advisors, call 305-379-8888 or e-mail firstname.lastname@example.org.
Employees and self-employed taxpayers who use their cars, vans or trucks for business purposes in 2017 may use a 53.5 cents per mile rate to calculate the deductible costs of operating those vehicles. This optional standard mileage rate, which is a slight decrease from the prior year, only applies to taxpayers who do not claim accelerated depreciation on a vehicle or a fleet of more than four vehicles used simultaneously.
In addition, effective January 1, 2017, taxpayers may deduct 17 cents per mile, two cents lower than in 2016, when using their vehicles for transportation for medical or moving purposes. The mileage rate for personal use of a vehicle for charitable work remains unchanged at 14 cents per mile.
About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at email@example.com.
Posted on December 15, 2016 by
News about cyberattacks and security breaches at the world’s most recognized brands is becoming commonplace. However, absent from the headlines is the significant rise in cybercrime among the nation’s small businesses over the past five years.
According to Symantec’s 2016 Internet Security Threat Report, of all the cyberattacks that occurred throughout the world in 2015, almost half (43 percent) targeted small businesses with less than 250 employees. That’s a 25 percent increase over 2011, when only 18 percent of small businesses reported being the victim of a cybercrime. These numbers do not take into account the increasing number of businesses that fail to report cyber security breaches. In response, small businesses can no longer sit on the sidelines and hope such attacks don’t happen to them. Rather, they must take proactive steps to protect their operations and the sensitive data of their businesses, vendors and customers or risk significant monetary and reputational losses.
With our increased reliance on technology, mobile devices and social media to access and share information, criminals now have a proliferation of new ways to commit cyberattacks and steal sensitive information for financial gain. This threat applies equally to multinational conglomerates, small businesses and solopreneurs across all industries. The unfortunate truth is that as technology continues to evolve at a rapid pace, businesses and individuals will have a harder time protecting all of their data 100 percent of the time. Yet, even small businesses with limited access to resources have the ability to build a strong defense that reduces their exposure to an attack and mitigates any threats to normal business operations and potential liabilities arising from a breach.
Information security encompasses much more than protecting a business’s digital data; it involves safeguarding all of an entity’s assets, systems, network and any other elements that are required for the business to maintain normal operations. The best way to identity risks and avoid interruptions in business continuity is to conduct a holistic review of all of a business’s functions, including finance, human resources, IT, sales and marketing, and machinery and equipment, and identify how these elements work together and where potential vulnerabilities may exist.
What role does IT play in supporting business strategy? How is the IT environment structured? Does the business rely on on-site servers or virtual servers in the cloud? Does it develop its own software or does its normal operations rely on a third-party’s Software as a Service (SaaS) applications? Do third-party service providers maintain proper controls and have Statements on Standards for Attestation Engagements (SSAE 16s) to back up their claims? Does the business and its service providers have back up plans and high degrees of redundancy to protect against any interruptions in normal business operations when a breach occurs? To answer these questions and protect against compromises to its information security, businesses must have in place strong IT policies and conduct regular IT audits and periodic tests of potential vulnerabilities.
Businesses may optimize the value of their investment in information technology services when IT is aligned with business goals and appropriately governed and managed to mitigate risks enterprise-wide. This requires strategic planning and special attention to matters involving physical and virtual security, password management and employee training to protect against the multitude of social engineering tactics that pose one of the greatest threats to information security.
With the increasing number of potential points from which unauthorized users may gain entry into a network, businesses can no longer rely on mere firewalls, malware and anti-virus software to protect their networks. While these tools are important, their ability to do the job for which they are intended requires businesses to keep them up-to-date. Software vendors regularly release product updates with patches to fix known vulnerabilities. It is critical that business owners take action and download software updates as soon as they become available in order to keep their websites, servers and defenses reinforced against any potential threats. Similarly, businesses may want to consider using encryption to bolster security of sensitive data.
Like software, passwords provide a basic level of security against cyber threats. The problem is that most employees tend to use passwords that are easy to for them to remember and just as easy for a criminal to crack. Businesses must establish and enforce strong password policies, which may require workers to use longer and more complex passwords containing numbers, letters and characters as well as two-step authentication. In addition, businesses should require employees to change and reset their passwords every few months.
Software and policies go only so far in keeping organizations safe from cyberattacks. Employees on the front line of business operations must understand their role in maintaining cyber security. This requires business to adopt a security-focused culture of ongoing employee training on the multitude of potential risks they will face each day, from malware attacks to phishing scams and other social engineering tactics that too easily trick workers into opening the door to scammers and compromising information security. Employees should be able to recognize the proliferation of social engineering threats as well as the steps they should take to avoid becoming a victim and putting the company at risk.
No business is immune to a security breach. However, by taking appropriate steps to regularly assess risks and employ best practices to prevent and detect a compromise of data security, businesses of all sized will be better prepared to recover and maintain their performance goals.
The professionals with Berkowitz Pollack Brant’s IT Advisory and Consulting Services practice help businesses, governmental agencies and not-for-profits maximize their investment in IT to improve business processes, comply with regulatory requirements and manage risk enterprise-wide.
About the author: Sean Chari is senior manager of Information Technology Consulting with Berkowitz Pollack Brant, where he works with privately held and publicly traded companies, governmental agencies and nonprofit entities to assess and leverage technology to minimize risks and improve business processes. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org
Employers have a new deadline to furnish W-2 forms to workers and file copies of Form W-2 with the Social Security Administration (SSA) for the 2016 tax year. The expedited January 31, 2017, deadline, which is one month earlier for paper filers and two months earlier for electronic filers, also applies to businesses filing Forms 1099-MISC that report payments exceeding $600 for the year to independent contractors or other service providers.
The change in filing deadline for the 2016 reporting period is the result of the Protecting Americans from Tax Hikes (PATH) Act, and the IRS’s efforts to authenticate the validity of Taxpayers’ individual returns and reduce the filing of fraudulent tax returns.
The new law also changes the rules for businesses to extend the time to file Form W-2. Employers seeking a 30-day extension must make a written request via Form 8809, Application for Extension of Time to File Information Returns, before January 31. Previously, employers had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit these forms and request an extension.
To prepare for the earlier filing deadline in 2017, businesses should be reviewing their accounting records to identify vendors that are subject to the reporting requirements. Each qualifying vendor that the business issues payments to should complete a Form W-9 to certify his or her tax status, name, address and tax ID number, which, in turn, will help determine if they should receive a Form 1099-MISC from the business.
As a result of the accelerated filing deadline, the IRS warns that taxpayers claiming either the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) should expect a delay in receiving any refunds to which they may be entitled. Under the law, the IRS must hold a taxpayer’s entire refund, and not just the portion related to the EITC or ACTC, until February 15. Taxpayers expecting a tax refund to make a major purchase or meet another financial obligation must plan appropriately, keeping the delayed refund date in mind.
The tax advisors and accountants with Berkowitz Pollack Brant work with individuals and businesses across a broad range of industries to maximize tax efficiencies and comply with frequently evolving tax regulations.
About the Author: Angie Adames, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Florida-based businesses have a unique opportunity to receive a tax credit or a sales tax refund of up to $200,000 per tax year when they donate money, property or other goods toward a community development or housing project that benefits the state’s low-income residents.
Under the Community Contribution Tax Credit Program, businesses that contribute to a community-based organization approved by the Department of Economic Opportunity (DEO) may receive a tax credit of up to 50 percent of the value of their donation. Businesses may apply the credit against their Florida corporate income tax or insurance premium tax. Alternatively, if the business is registered to collect and remit sales tax with the state’s Department of Revenue, it may apply for a sales tax refund of up to 50 percent of the value of the donation to an eligible organization. Unused portions of the maximum corporate tax credit ($200,000 per year) may be carried forward for up to five tax years; unused sales tax refunds may be claimed for no more than three years.
Businesses expecting to receive a credit, must first confirm that their donations are made to qualifying organizations and projects that have applied for and received approval from the Department of Economic Opportunity. Furthermore, their donations must be applied to cover a housing project’s development impact and management fees; a down payment or closing costs; housing counseling and marketing fees (not to exceed 10 percent of the donation); removal of liens recorded against residential property by municipal, county or special-district local governments.
To claim a Florida corporate income tax or insurance premium tax credit, businesses must send to the DEO the following:
- A completed Application for a Community Tax Credit (Form 8E-17TCA#01), which can be found at www.floridajobs.org
- A copy of the donation check or appraisal of the donated property
- A copy of the sponsoring organization’s certification
- A copy of the sponsor acknowledgment letter or other proof that the donation was received
In addition, businesses claiming the tax credit must submit a copy of the donation approval letter when filing their Florida Corporate Income Tax Return or Insurance Premium Tax Return.
To claim a sales tax refund, eligible businesses must first confirm with the DEO, in writing, that their contribution indeed qualifies for a tax credit. Next they must submit the following items to the DEO:
- A completed Application for a Community Tax Credit (Form 8E-17TCA#01), which can be found at www.floridajobs.org
- A completed Application for Refund (Form DR-26S), which can be found at www.floridajobs.org
- A copy of the DEO’s approval letter
Tax credit applications must be received by the DEO between July 1 and July 15 before they are processed and can be approved on a pro rata basis if requested applications exceed tax credit allocations. After July 15th, tax credit applications are processed on a first-come, first-served basis if tax credits are available.
About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and high-net-worth individuals. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.
It can be argued that online shopping is a panacea of convenience for consumers. However, online retail therapy doesn’t come without risks, especially when considering the countless ways cybercriminals scam consumers and trick them into sharing private information to steal their identities or commit fraud.
To avoid becoming a victim of identity theft, consumers should remember the following tips when shopping online.
Look for the “s” in the website’s URL. Before sharing any information about your identity or financial accounts, ensure that the web address contains an “s” for security. Any websites that do not begin with the letters “https” is not safe.
Avoid Public Wi-Fi Hotspots. While public wi-fi networks enable us to stay connected and productive 24/7, the fact is that many of these hot spots are not secure. Criminals can easily snoop on users’ activities and gain access to passwords, home addresses and credit card information. Wait until you are at home or have access to a secure connection before paying bills or making purchases online.
Know Your Retailers. There is a proliferation of e-tailers that claim to offer consumers the best products at the best prices. However, many of these websites are scams. Before purchasing any product online, be sure you know the retailer and have a good understanding of its track record in providing customer service.
Avoid Phishing Emails. Avoid opening attachments or clicking on links contained in emails from sources that are unknown to you. When you receive a “special offer” from a retailer you frequent, open a web browser and type in the URL rather than opening the website from the email. In addition, be on alert for emails that ask you to update your account information and appear threatening. These are often scams.
Set up Transaction Alerts with your Credit Card. Most credit card companies allow their customers to sign up to receive transaction alerts via email or text message whenever a charge is processed online or when there is unusual activity that may point to fraud. This simple step can go a long way toward preventing fraudulent charges.
Keep a Close Eye on Financial Accounts. Be diligent reviewing your monthly bank and credit card statements. If you see anything suspicious, such as an unauthorized charge or withdrawal, immediately notify the financial institution.
About the author: Joseph L. Saka, CPA/PFS, is co-CEO of Berkowitz Pollack Brant and co-director-in-charge of the firm’s Tax Services practices. He provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He may be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.
Sorting through mountains of emails to identify one single piece of evidence may seem like an impossible undertaking for the average person. Computer forensic experts, however, are well-versed in applying the right methods and using the appropriate software and other tools to turn what many consider an overwhelming and unmanageable process into a simple task that may be completed within hours or days. It all boils down to narrowing a search to only relevant email addresses, eliminating duplicates, conducting key word searches and leveraging software to extract and preserve vital data that is stored, or even deleted, from a hard drive, a cloud server or a mobile device. What’s left is a much smaller, more manageable population of data to weed through.
Early Case Assessment. Prior to beginning the eDiscovery process, it is important for investigators to conduct an early case assessment that identifies, among other things, the key issues at stake and the amount of potentially relevant data involved to determine the costs and risks associated with pursuing legal action. After an assessment of the relevant data, counsel can craft a more informed strategy for how to proceed.
Filter Out Non-Relevant Emails. Consider the recent, well-publicized FBI investigation into Hillary Clinton’s private emails. The FBI sought to find specifically those messages in which Clinton was the sender, the recipient, or a copied participant in the communication via carbon copy (CC) and blind carbon copy (BCC). To filter out its database to only those emails relevant to its investigation, the FBI simply ran a search to identify all emails in which Clinton’s email address was in the To, From, CC and BCC fields.
Eliminate Duplicate Emails. De-duplication is the process of comparing electronic records based on certain characteristics and eliminating duplicates from the database. This, combined with the filtering out of non-relevant emails, helps to pare down large databases of emails to a more manageable size. As the number of devices consumers use increases, de-duplication is an important and beneficial process in eDiscovery matters. This is because every time an email is sent, a minimum of two copies are created in the user’s sent box and the recipient’s inbox. In the case of Clinton’s emails, computer forensic experts relied on software to help the FBI compare newly identified emails to those already reviewed from Clinton’s server to eliminate duplicate messages from its search and reduce the population of emails it had to review.
Application of Search Terms. Forensic experts can further reduce the population of emails for review by applying search terms that are based on the knowledge of the issues gained by counsel, the computer forensic expert and other interested parties during the course of an investigation. These search terms can be applied to the subject, body and metadata associated with email messages. Examples of metadata associated with a file are the author, date created, date modified and file size. Perhaps the most effective use of metadata information to reduce population size is to limit searches to relevant dates or to a specific date range. In the case of emails, these would include sent and delivery dates.
Automated searching through email attachments and documents may not always be possible, especially when these files are saved as photos or documents scanned to Adobe Portable Document Format (PDF), neither of which may be in a searchable format. However, computer forensic experts can use optical character recognition (OCR) to convert the characters contained in these files into searchable text documents. This will facilitate attachment searches that may otherwise be overlooked or would require a time-consuming manual review. The overall result of these techniques allows the investigative team to focus their detailed review to relevant de-duplicated emails within a specific date range and applying only certain key words germane to the issues within the investigation.
Efficient Review. Emails and files not eliminated from the scope of inquiry by the above steps must be reviewed by an actual human being. Due to time limitations, it is usually not feasible for a single person to review all items, especially in matters involving a significant amount of files. A coordinated review plan and a dedicated team of reviewers is critical to ensure success. Such coordinated review plans are now conducted in tandem with third-party eDiscovery vendors that provide a platform allowing for the review by multiple individuals across various locations. The comparison and selection of an appropriate eDiscovery vendor are therefore crucial given the wildly different platforms and technologies used by these vendors and the significant associated costs.
Berkowitz Pollack Brant’s Forensic Accounting and Litigation Support practice has the tools and professional skills required to conduct forensic computer and mobile device investigations on a wide range of complex matters, including eDiscovery issues on matters where search and review are at the forefront. Our professionals have extensive experience supporting legal counsel and analyzing large quantities of data to uncover a trail of financial facts in matters involving divorce and family disputes, complex business litigation and business disputes, bankruptcy and reorganization, and claims of fraud brought by corporations and governmental regulatory agencies.
About the Author: Martin Prinsloo, CFE, CISA, CITP, CFF, is an Associate Director with Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice, where he applies business skills and technical expertise to support acquire, preserve, validate and analyze digital data for use in legal proceedings. He can be reached at the CPA firm’s Miami office at (305) 379-7000, or via email at firstname.lastname@example.org.
On November 22, the Eastern District Court of Texas issued an injunction blocking the implementation of the Department of Labor’s Overtime Rules, which were set to go into effect on December 1, 2016. As a result, more than 4 million American workers may not qualify for 1.5 times their base rate of pay for each hour worked beyond a typical 40 hour week. Despite the current delay and potential end to the regulations, businesses must still be in compliance with the existing overtime pay rules and classify employees accordingly.
The new regulations, issued in May 2016, called for double the annual salary under which full-time employees would qualify for overtime pay to $47,476, an amount that was set to increase automatically every three years. Many businesses spent the past six months preparing for the rules by investing time and money in new systems to help classify workers and track their hours. Some businesses reduced the hours of existed salaried workers while others hired more party-time workers to avoid paying time and a half.
With the court’s recent decision, businesses that were waiting to implement the rules on December 1, may hold off on taking any further action while maintaining their compliance with the current regulations, which calls for paying overtime to salaried workers earning $23,660 annually. However, in the event the injunction is lifted, these employers should be prepared to not only implement the new law quickly but also to make retroactive payments to those workers who should have been paid overtime during the injunction period.
Conversely, employers that already adapted to the new regulations and communicated the change to their workers should consult with tax and legal counsel to determine their employee compensation obligations under state law as well as whether they should revert back to the old rules or move forward with their plans.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
November 1, 2016, marks the start of the fourth open enrollment period under the Affordable Care Act. From this date through January 31, 2017, consumers may sign up via Healthcare.gov or a state-run exchange to purchase minimal essential health insurance coverage for the entirety of 2017.
For 2017, consumers face a 22 to 25 percent increase in premiums from a significantly smaller pool of insurance providers offering, in some cases, fewer primary care physicians participating in their plans. However, according to the administration, more than nine in 10 people may qualify for an Advanced Premium Tax credit, which can make the cost of coverage more affordable. According to the U.S. Centers for Medicare and Medicaid Services, these subsidies, which are available to individuals with household income of up to $47,520 for individuals or $97,200 for a family of four, enable most Americans to find a Marketplace health insurance plan with premiums from $50 to $100 per month.
The penalty for failing to have health insurance is an individual shared responsibility payment, which in 2016 was the higher of 1) $695 per adult and $347.50 per child under 18 for a maximum penalty of $2,085 per family, or 2) a penalty equal to 2.5 percent of one’s annual household income above the tax filing threshold up to a maximum of the national average price of a Bronze plan sold through the Marketplace. The per-person penalty is expected to increase in 2017, making it more expensive for individuals to go without coverage.
Following are important options for individuals to consider in order to meet their shared responsibilities under the Affordable Care Act.
- Determine Eligibility for the Advanced Premium Tax Credit,
- Keep Dependents under 26 on Parents’ Plans,
- Shop Around. Even if a consumer is happy with the health insurance they paid for in 2016, it makes good financial sense to review that plan against others to identify potential cost savings next year. Additionally, consideration should be given to an individual’s unique medical issues and the possibility of paying more up-front in premiums for a lower deductible. Consumers who were enrolled in Obamacare in 2016 will be automatically reenrolled in the same plan in 2017 unless they select a new plan.
- Determine Eligibility for an Exemption. The ACA provides an exemption from the shared responsibility penalty when consumers can demonstrate that they meet any of the following conditions during the tax year:
- The lowest-priced health insurance plan that was available to them through an employer or a marketplace cost more than 8 percent of their household income
- They were uninsured for less than three consecutive months during the year
- They were incarcerated
- Ineligible for Medicaid because the taxpayer’s state of residence did not expand Medicaid coverage
- They have a pending or successful resolution of a qualified healthcare plan eligibility appeals decision
- They experienced a named hardship, including, but not limited to, homelessness; threat of eviction or foreclosure; bankruptcy; substantial debt resulting from unpaid medical bills; increased expenses for the care of an ill, disabled or aging family member; death of a close family member; domestic violence; and significant property damage due to a disaster
- They experienced another hardship, for which they can defend their claim with proper documentation.
Taxpayers should meet with their accountants before the open-enrollment period ends in order to meet their responsibilities under the Affordable Care Act and avoid unnecessary penalties.
The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practices work with individuals and businesses of all sizes to understand and comply with the provisions of Affordable Care Act.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail firstname.lastname@example.org.
Financial experts are often utilized by attorneys in commercial litigation cases. The goal is to make the injured party whole; in other words, to return the plaintiff to the financial condition the business would have been in but for the alleged acts of the defendant. Economic damage claims can be calculated by analyzing the affected business from two different perspectives – lost profits or lost business value, depending on the facts and circumstances of each case. The decision of which approach is appropriate should be decided by the damages expert and counsel early in the case, being aware that a business cannot typically recover both lost business value and lost profits.
The amount of damages under both approaches could be similar if all else is held constant. However, in reality, the damages may be significantly different due to the inherent differences in both approaches, which are discussed below.
On June 6, 2014, the Florida Supreme Court approved jury instructions for contract and business litigation that concisely presents the concepts of contract damages. Instruction 504.3, Lost Profits, explains that to recover lost profits, a claimant must prove the defendant caused the claimant’s lost profits and the amount of lost profits must be established “with reasonable certainty.” Instruction 504.4, Damages for Complete Destruction of Business, is only given in the case of a “complete destruction” of the claimant’s business. The jury is instructed that the claimant’s damages are based on the market value of the business; anything less than “complete destruction” would be compensated via the “lost profits” instruction. (Source: In re Standard Jury Instructions – Contract and Business Cases, Instruction 504.3-504.4, 116 So. 3d 284 (Fla. 2013)).
In many valuations (under the fair market value standard), the parties are the hypothetical willing buyer and willing seller as discussed in IRS Revenue Ruling 59-60; in lost profits analyses, the parties are not considered to be either hypothetical or willing. Another of the differences between a compliance-related valuation (i.e., those for tax and financial reporting purposes) and a valuation related to economic damages is that the business value in a compliance-related valuation is as of one specific date in time, whereas in a damage claim for diminution in business value, the value of the business is determined both before and after the causative act as of the dates decided by the court.
In a loss of business value calculation, only the facts known or knowable as of the valuation date are generally considered. The courts in some cases have allowed hindsight, even where there has been a loss of business value, such as when, if hindsight were not allowed, it would result in either a windfall gain or an unfair penalization of the plaintiff.
An early case, frequently cited even today, allowed hindsight and is referred to as the “Book of Wisdom” based on a 1933 U.S. Supreme Court decision in the case of Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 US 689 (1933). The decision in this case advocated the use of actual results to determine what the value of a patent should have been on the valuation date by proving the “elements of value that were there from the beginning”. The decision in Sinclair Refining effectively allowed for a valuation based on actual results after the valuation date that would supplant market value (based on forecasted data) estimated as of the valuation date since that assessment failed to accurately determine value for the undeveloped patent.
However, in a lost profits calculation, facts and events occurring after the alleged harmful actions of the defendant are considered. If the business lost earnings for a finite period of time, damages can be determined by using a lost profits approach and then adjusted for any mitigation of those damages by the plaintiff.
In the analysis of lost business value under an income approach, the discount rate utilized would typically be either the injured entity’s equity rate of return or its weighted average cost of capital (WACC), calculated using either a build-up method or the capital asset pricing model (CAPM). However, the discount rate utilized in a lost profits calculation could be one of those or others such as the plaintiff’s cost of debt, or its internal rate of return. Another option allowed by some courts is that the projected cash flows can be adjusted to account for the risk associated with them and a risk-free (or risk reduced) rate can be used.
Lost business value calculations consider all costs needed to generate the entity’s revenues and profits as compared to lost profits analyses, which typically place greater emphasis on costs associated with the lost revenues.
As is evident from the discussion above, the calculation of damages under either the lost profits approach or the loss of business value approach is complex and dependent on the facts and circumstances unique to each case, making it very important to utilize experienced, credentialed damage experts that will provide optimum assistance to counsel.
About the Author: Sharon Foote, ASA, CFE, is a member of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice. She can be reached in the firm’s Miami office at 305-379-7000 or by email at email@example.com.