Success Stories
Success stories related to estate and gift tax valuations:
1. Synergistic purchase of an identical 50% ownership interest on the date of death -- An attorney contacted us one morning and explained that his client had died the day before. The client, who was in his 80's, owned 50% of a company. The other 50% had been owned by the client's nephew and niece.
The Company had previously negotiated to redeem the 50% interest owned by the nephew and niece but the parties had not been able to agree on price. Without the client's knowledge, the nephew and niece had negotiated the sale of their 50% interest to a Fortune 100 company. The Buyer was a direct competitor of the Company.
The day the client died was the day scheduled for the Company's annual meeting. Executives of the Buyer planned to attend the annual meeting and announce that Buyer now owned 50% of the Company's outstanding shares. However, because the client died before the scheduled meeting time, the annual meeting was cancelled.
The price paid by the Buyer for the 50% ownership interest was very high relative to the Company's earnings. The Attorney's question for us was whether the price paid, in effect, "fixed" the value of the identical 50% ownership interest owned by his client. We explained that, due to synergies between the Buyer and Seller, the Buyer may have paid a price greater than fair market value. A higher value such as this is often referred to as "synergistic value" or "investment value". For estate tax purposes, the standard of value that must be used is "fair market value". Fair market value is the value of the Company based on its own earnings. Investment value is the value to the Buyer considering the synergies between the two Companies.
Blum & Colombe, Ltd. was engaged to perform a valuation of the client's 50% ownership interest for use in preparation of his estate tax return. In performing that valuation, we reviewed certain correspondence of Buyer related to the purchase.
In that correspondence, Buyer included an in depth explanation of the synergies that would result from the combination of the two Companies. These synergies included a dominant position controlling the world market of a commodity used by the two companies. We used this correspondence to explain the reason Buyer was willing to pay such a high price for the 50% interest that it purchased. We then calculated the fair market value of the client's 50% ownership interest based on the Company's earnings.
2. Sale of the Company, at a synergistic price, 18 months after the date of death -- Our client died owning the majority of a Company. We were engaged to value the client's ownership interest in conjunction with the preparation of the federal estate tax return. The Company dominated its industry. Both the Company and the industry were mature. Considering these factors, we valued the Company at 10.0 times net income (the Company was a C Corporation) plus excess cash. Our valuation of a 100.0% ownership interest was $160.0 million. The estate tax return was filed based on our valuation of the decedent's ownership interest.
Approximately 18 months after the date of death, the decedent's heirs were presented with an unsolicited offer to purchase the Company. After negotiations, the Company was sold for $300.0 million.
Shortly after that, the IRS audited the decedent's estate tax return. Aware of the subsequent sale of the Company, the IRS concluded that we had significantly under valued the Company. They attempted to make a significant adjustment to the amount of Estate tax due -- 55.0% of $140 million.
We met with the CEO of the Buyer, which was a publicly held company. He explained the synergies between the acquired company and his company. With this information, we were able to demonstrate to the IRS that the difference between the price paid and our valuation was due to the increase in earnings resulting from the synergies. The IRS agreed to settle for a relatively minor amount.
3. Gifting the entire Company prior to sale -- Our clients owned a Company that was growing rapidly. We worked with the client and their attorney over an approximate 10 year period performing valuations related to gifts of Company shares made to their four adult children. Eventually, the entire Company was owned by the four children. Shortly after the last gifts were made, the Company was sold for approximately $500.0 million.
Success stories related to litigation support matters:
1. Promissory estoppel case #1 -- Our client assisted his childhood friend in developing a business plan, obtaining an SBA loan and negotiating a long term lease for a newly formed business. Our client provided these services without a fee with the understanding that his compensation would be a 20% ownership interest in the business. However, when the business commenced operations, he was not awarded any ownership interest. The client engaged an attorney and the attorney engaged Blum & Colombe, Ltd. to opine as to the client's damages.
At the time of the trial, the Company was still in a start up phase and, accordingly, was generating operating losses. We demonstrated that the Company was far outperforming the projections included in the SBA loan application and calculated the pro forma value of the Company at various future dates assuming that it met its projection.
The jury awarded our client the highest value that we calculated. The decision was appealed and our client won on appeal. As a result, the decision became case law.
2. Promissory estoppel case #2 -- Our client had a desire to start a certain business but did not have the financial resources to do so. Acquaintances of our client (the Investors), who had the financial capability to start the business, suggested that they would build and own the facility (which required most of the capital) and lease it to an operating entity which would be owned 50% by our client and 50% by the Investors. Plans called for our client to be the manager of the operating company. Our client did the majority of the work planning the business and facility. Within a few days before the ground breaking to build the facility, the Investors presented a new deal to our client whereby he would be the non owner manager of the operating company with an annual salary of $60,000. Our client refused so the Investors proceeded to build the facility and commence the business without any participation or involvement of our client.
Our client engaged an attorney and the attorney engaged Blum & Colombe, Ltd. to measure the damages. The attorney explained that a breach of contract claim had been filed. We told the attorney about promissory estoppel case #1 outlined above and suggested that this case had a similar fact pattern. A promissory estoppel claim was immediately added. Three months later, the breach of contract claim was thrown out by the Court. The case proceeded to trial under the promissory estoppel claim. At trial, the jury awarded our client the highest damage number we calculated plus treble damages.
3. Violation of a noncompete -- A chiropractic student interned for our client and, after graduation, became a full time employee of our client. Our client soon opened a new office which the young chiropractor staffed. After a year or so, the young chiropractor left the employment of our client and started his own practice in an office near the location which he staffed for our client.
Our client's attorney engaged us to measure damages. The jury awarded our client the exact amount that we testified to as our client's damages.
Success stories related to Merger / Acquisition services:
1. Add on acquisition at 2.0 times EBITDA -- Our client was planning to start a new division that was complimentary to its existing business. We explained that we were aware of an existing company in the same business planned for the new division and that the business might be for sale. Our client authorized us to contact the owner of the business and determine if he would consider selling. The owner was interested in selling so our client engaged us to negotiate the purchase.
The business generated nominal earnings. However, the Seller would not agree to sell unless he was paid a significant amount. We determined that amount to be approximately 2.0 times the amount of EBITDA that our client would generate from owning the Company. The difference in the amount of earnings for Seller and our client was due to costs incurred by the Seller that would not be necessary for our client.
That transaction closed at a price that was very favorable to both the Seller and the Buyer.
2. Purchase of a bankrupt company -- Our client contacted us and requested that we pursue the acquisition of a bankrupt company on behalf of his Company. The business operations of the bankrupt company would be a new, but very compatible, product line for our client.
We contacted the bankruptcy trustee and obtained a significant amount of information about the bankrupt company. The company had generated annual sales of approximately $12.0 million, however, due to the economic recession, its sales had declined to approximately $3.5 million. We determined that, at annual sales of $3.5 million, our client would generate EBITDA of approximately $1.0 million from this business. There were two reasons. One reason was that our client would have significantly lower material costs than the bankrupt company. The second reason was that our client had excess capacity and, therefore, would not incur significant overhead costs that the bankrupt company had.
The only asset that our client needed from the bankrupt company was the molds. The bankrupt company had spent over $2.0 million for these molds. We successfully negotiated the purchase of all of the molds for $150,000.
3. Purchase of a company's subassembly operation -- We assisted our client in successfully taking over a company's subassembly operation. This included a multi year supply agreement between our client and its new customer and our client's acquiring the related assets, leasing the related facility and hiring the former employees of the customer. We also assisted our client in obtaining significant financial assistance related to this transaction.
