John Lawler (Petitioner) Versus Carol Lawler (Respondent)
Forensic Accountants’ Positions and Ruling by the Court
Presented by Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA
In the previous newsletter, I discussed the stipulations agreed upon by the parties for this trial, as well as a brief mention of the positions the forensic accountants would need to address. Here, I present the methods used and the conclusions drawn by each of us, as well as the ruling by the court.
Valuation of the Practice
The other forensic accountant (The Other FA) noted that substantial debt is unusual for an accounting practice. However, the firms that comprised Lancaster, Lawler, Roxford and Stamford (LLRS) were highly leveraged and Petitioner (John Lawler) personally guaranteed the acquisition loan. The Other FA acknowledged that by using a capitalization of excess earnings approach, which is commonly used in family law, the value of the practice would have been $2,440,000. He rejected using this approach, however, because he would have had to subtract long-term debt, which would have resulted in a negative value of the business.
The Other FA testified that it was difficult to calculate reasonable compensation based on statistics in this case. He used the income for a typical CPA partner in a large west coast firm, understanding that Petitioner had no actual partners, although the firm employed 28 accountants.
He then acknowledged on cross-examination that he had changed his analysis after his meet and confer with me from a value of $4,392,000 to $2,440,000.
I came to a gross value of the business of $7,886,000 by using a weighted average of an excess earnings approach yielding 60 percent, a capitalization of earning approach yielding 30 percent and a market approach yielding 10 percent.
Using the market approach, I applied a multiplier of 1.08 as compared to The Other FA’s .82. I testified that the lower multiplier is typically used for a firm with much higher revenues (in the $70,000,000 to $80,000,000 range). For excess earnings, I used a weighted average of firms sold within the previous five years and added to that average officer compensation, including perquisites, less reasonable compensation.
In my capitalization of earnings analysis, I used earnings before taxes, subtracted the state and federal taxes, multiplied the result by a 4.5 cap rate and added excess working capital.
I also testified that The Other FA and I had two main differences in the perquisites we considered for petitioner; bank charges and office expenses.
I did not include the contingent payment to Roxford for acquisition of that firm for any purpose. Since the acquisition of Roxford beyond the down-payment was a percentage of the income only from that acquired practice for a fixed period of time, I considered it was basically a commission as the income occurred, not an actual debt. The Other FA, however, defined it as an amount owed regardless of revenues. When The Other FA modified his valuation of LLRS prior to the trial, he included the contingency and adjusted the income stream prospectively, resulting in a lower present day value of LLRS. I testified that I had received an initial valuation from The Other FA of $4,392,000 and that he lowered it just before trial to remove the Roxford payment. He then characterized it as a loan, resulting in a figure of $2,440,000.
Another primary difference between the two valuations was that I added back a $52,000 VISA obligation as a personal expense of Petitioner, which was paid off before the report, and that it coincided with the post-separation purchase of a Virginia property. Petitioner characterized this as a distribution to Petitioner while I classified that draw as income for purposes of assessing cash flow available for support.
I testified that there was a purchase offer for the Gould CPA firm after the agreed-upon date for valuation at trial but before the parties actually went to trial. Furthermore, I testified that because of the stipulation, I would not change the valuation date but that the new acquisition might affect the multiplier I would have used had I been informed of the pending acquisition.
The Court’s Ruling
“… The Other FA’s reasonable compensation figure is less compelling than Mr Anfuso’s given the source of the data used. The Court is concerned that The Other FA developed
a new theory of how to incorporate the Roxford acquisition
debt on the eve of trial resulting in a reduction on value of nearly one-third from his valuation a week before.”
“Mr Anfuso’s basis for his valuation appears sound. His multiple is well-justified and the basis for his reasonable
compensation figure makes sense.
“… The Court believes that it can excise the Gould
acquisition in that the acquisition is quite remote in time from the date of separation, but that the existence of the firm as it was on the date of separation, served as the foundation for the subsequent acquisitions, and, more particularly, the retention of clients from those acquisitions. By doing so, the Court determines that it is equitable to value the COMMUNITY PROPERTY PORTION of the business at $4,000,000, without the consideration of the Gould acquisition, as an offset to any separate property interest Petitioner may have in the firm prior to the Gould acquisition and in consideration of his failure to provide advance notice of the Lancaster and Stamford acquisitions as required by the ATROs.”