Chicago Bar Association Family Law Presentation February 22, 2007 Presented by:

2. Chicago Bar Association Family Law Presentation February 22, 2007 Presented by: John W. Hayes, Managing Director Anchor Planning & Valuations, Ltd.

3. Forensic Reconstruction Techniques

4. Individual Reconstruction • Lifestyle Cash Flow • Net Worth

5. Business Reconstruction • Unreported Income • Non-business Expenditures

6. The Engagement • Meet with Attorney/Client • Define & Plan Engagement • Obtain Engagement Letter • Obtain Large Retainer • Run Background Check • Search Public Records

7. The Engagement • Prepare Document Request • Analyze Financial Information • Interview All Parties • If Business, Tour Premises • Perform Forensic Procedures • Prepare Forensic Report

8. Unreported Income Risk Factors • Motives • Messy Divorce • Drug or Gambling Habits • Hide Assets from Spouse • Financial Needs • Peer Pressure • Affair • Heavy Debt • Excess Lifestyle

9. Unreported Income Risk Factors • Opportunity • Spouse Controls Financial Records • Spouse Controls Family Spending • Spouse Owns Cash Business • Business Pays Personal Expenses

10. Individual Reconstruction • Lifestyle Cash Flow • 24 Months Prior to Separation • Data input all expenditures • Analyze categories for reasonableness • Include estimated cash expenditures • Prepare Exhibit

15. Business Reconstruction • 5-Year Spreadsheet • Vertical and Horizontal Analysis • Comparison to Industry Ratios • Identify Period When Ratios Changed

16. Business Reconstruction • Determine Mark Up on Cost of Goods • Look for Overstatement of Expenses • Reconstruction Sales Bases Upon Mark Up

22. Questions & Answers

23. What is Business Valuation? The act or process of determining the value of a business enterprise or ownership interest therein.

24. Uses of Business Valuation Reports • Related to Buying / Selling • Sale of a Business • Mergers & Acquisitions • Divestiture • Initial Public Offerings • Allocation of Acquisition Price • Buy/Sell Agreements • Franchise Valuation or Evaluation • Split-ups/Spin-offs

25. Other Than Buying/Selling • Adequacy of Life Insurance • Gifting Programs • Estate and Gift Taxes • Charitable Contributions • Eminent Domain

26. Other Than Buying/Selling • Employee Stock Ownership Plans (ESOP’s) • Fairness Opinions • Lease versus Buy • Mediation & Arbitration • Succession Planning

27. Litigation Support • Dissenting shareholder actions • Divorce • Economic Loss Analysis • Disruption of Business • Partner Disputes • Wrongful Death

28. Types of Clients • Business Owners • Attorneys • Judges • Creditors • Financial Institutions and Planners • Insurance Companies • Real Estate Appraisers • Other Business Valuators

29. Who Can Be A Qualified Valuator? • Economists • Investment Bankers • Business Brokers • Financial Analysts • Certified Public Accountants (CPA’s)

31. Professional Designations • American Society of Appraisers (ASA) • Accredited Senior Appraiser • Institute of Business Appraisers (CBA) • Certified Business Appraiser • National Association of Valuation Analysts (CVA) • Certified Valuation Analyst

32. Professional Designations • American Institute of Certified Public Accountants (ABV) • Accredited in Business Valuation • Canadian Institute of Chartered Business Valuators (CBV) • Chartered Business Valuator • Association for Investment Management and Research (CFA) • Chartered Financial Analysts • Oriented primarily to public companies, includes material on private company valuation, and several hundred CFA’s specialize

33. Professional Standards Uniform Standards of Appraisal Practice (USPAP) • Established in 1987 by The Appraisal Foundation • Consists of eight (8) appraisal organization and ten (10) non-appraisal organizations interested primarily in real estate appraisals • The most widely cited and recognized set of professional standards for appraisals is the Uniform Standards of Professional Appraisal Practice (USPAP), published by The Appraisal Foundation.

34. Professional Standards • The Foundation is located at 1029 Vermont Ave., NW, Suite 900, Washington, D.C., 20005, ph: (202) 347-7722. • USPAP is updated each year in November, to be effective the following January 1. • It covers appraisal for all disciplines, including real estate, personal property, and appraisal of businesses, business interests, and intangible assets. • Two (2) of USPAP’S ten (10) standards apply to business valuations and were added due to the number of members performing business appraisals.

35. Professional Standards • Standards published be each of the above organizations are somewhat more detailed than USPAP. • However, none of them are in conflict with USPAP. • All of these organizations’ standards are available at no charge.

36. Professional Standards Summary All Organizations Require: • Ethics • Competency • Consideration of all recognized valuation approaches • Clear and accurate reports

37. Selection of a Valuation Professional • Education • Training & Continuing Education in Business Valuation • Technical training, accreditation and certification • ASA, CBA, CVA, ABV, CBV and CFA • Experience • Certified Public Accountant • Specific Industry Experience - Skills and expertise in tax treatments, IRS regulations, financial analysis, and business valuation experience

38. “Top Ten” List for Attorneys • Define the project. • Understand the standard of value. • Involve the appraiser early on. • Distinguish between a business appraisal and a real estate appraisal. • Establish a reasonable time frame.

39. “Top Ten” List for Attorneys • Insist on an appraiser with experience and credentials. • Know the primary business valuation methods. • The appraisal is the first line of defense. • Litigation support issues. • Expect the best.

40. Definitions • Fair Market Value • The price at which an asset would change hands between a willing buyer and a willing seller • Enterprise and Invested Capital • The sum of debt and equity capital • Equity • This is the value to all shareholders

41. Definitions • Majority vs. Minority • Control premium – the premium, over the minority price, that a buyer would pay to gain control. • Discount for lack of control – the amount by which the majority value is reduced to obtain a minority value. • Marketability Discount • This reduction in value accounts for the stocks lack of a liquid market.

42. Definitions • Standards of Value • Fair Market Value • IRS Ruling 59-60 “…the amount at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” • Fair Value • Defined by individual states and is based upon the case law precedents involving dissenting stockholder actions.

43. Definitions • Investment Value • Value of a business asset to a particular buyer as compared to a population of willing buyers. • The purpose and function of the business valuation is to determine the proper standard of value used in a valuation

44. Definitions • Premise of Value • Going Concern – The value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems and procedures in place.

45. Definitions • Liquidation Value – the net amount that can be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced” • Orderly • Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received. • Forced • Liquidation value at which the asset or assets are sold as quickly as possible, such as at an auction.

49. John W. Hayes, CPA/ABV, ASA, CVA Toll Free: (800) 898-3048  Email: anchorjwh@cs.com 1010 Jorie Blvd Suite 380  Oak Brook, IL 60523 Telephone: (630) 573-7654 Fax: (630) 573-9930 Cell: (630) 670-7654