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Determining a fair share.

Ferreting out a business's proper value is the basis for one successful CPA practice.

Gary Trugman's career in business valuation began during his own divorce. Trugman had worked for small CPA firms and as a company controller before buying a traditional accounting services practice in northern New Jersey from a relocating CPA. After he'd been in business two years, he went through a divorce and his attorney asked him how much his practice was worth. "I haven't a clue," Trugman admitted. The attorney explained the effect of the state's equitable distribution laws and strongly suggested that Trugman read up on business valuation to understand how the laws would affect him. Trugman discovered a book called Valuing a Business, by Shannon Pratt, president of Willamette Management Associates and one of the foremost authorities on the subject, which proved to be a good introduction to the field.

Within a year, Trugman received a call from an attorney with a client whose husband owned a gas station. Could Trugman value the business as part of a divorce case? Before we knew of the knowledge he had gained from his own personal experience, he felt confident enough to say yes.

One goal of this type of engagement is to find unreported income. Trugman uncovered $94,000 worth. This success and the fun he had on the case helped convince Trugman that valuation was a business worth pursuing. In the eight years since his first case, Trugman has built his fascination with the field into a thriving business valuation practice.


Trugman spends about 80% of his time valuing businesses in divorce cases and the rest doing appraisals in stockholder disputes and damages litigation. He relies on skills used in traditional accounting engagements to help in his work. "Experience as a tax practitioner, with representation before the IRS, becomes very useful because you know all the ways IRS agents have gone after your client over the years, you know where they look, so you do the exact same thing," he says. He also uses an auditor's intuition and a businessperson's sense of value, along with constant study in valuation sciences, to help him do his job.

While financial statements and tax returns are his first resources, he also analyzes business and personal records and attempts to quantify what a couple's life-style says about their likely financial situation. For example, when a couple has expensive homes and belongings and the business owner and main wage earner claims he or she nets very little on the business, "there may be more there than meets the eye," he notes.

To perform a quality appraisal, Trugman requires a minimum of 25 hours--if he is already fairly familiar with the industry and has done research on the area. His fees can range from $6,000 to $8,000 per engagement, a high price for many small business clients. But Trugman insists appraisers must take the extra time to ensure they deliver a quality product.

As a result, because of the reputation he has developed in the legal community and through active involvement in appraisal organizations, Trugman is sometimes retained mutually by both sides in a divorce case to save not only the cost of two appraisers but also the legal expense of fighting over two differing valuations. Trugman also is frequently appointed by judges to mediate two widely separated appraisals.

"I have on many cases turned to the attorneys and said, 'Let's stop this now. There aren't enough dollars here to justify going further,'" he explains.

Another option he offers is an opinion letter on whether a business merits a full valuation, which he prepares after reviewing financial statements and tax returns. Attorneys use the letter to convince battling spouses that negotiation is the best option. "Very often, an attorney contacts me about a very small, part-time business when he or she is not sure it even has any value. But from a legal standpoint, if it isn't valued, the lawyer has potential liability problems." Trugman charges $750 for the letter, which, although it offers no opinion of value, states whether an appraisal is worth pursuing. This service has gotten Trugman a great deal of repeat business because attorneys appreciate a reasonable solution to client disputes.


Trugman always charges by the hour because it's impossible to know how much time he'll need to do a job well. "I never know if it will take me 25 hours or 105 hours." The range is affected by the investigations Trugman must do or by the obscure nature of some businesses. He has used unusual approaches to valuation problems. For example, in one case, his client's husband owned a pizza parlor. The client's attorney subpoenaed suppliers' records so Trugman could determine how many pounds of flour the parlor used weekly. Trugman then spent time with another client who owned a pizzeria to count how many pizzas could be made with an 80-pound bag of flour and used that yield analysis in his valuation. Trugman concluded the husband had a great deal of unreported income. When a judge questioned his conclusion, Trugman said, "Your honor, either he wasn't fully above board with me or he must be making 15-pound pizzas. Even if mice got in the bags, there's only so much they could eat."

To get a sense of a car wash's receipts, Trugman has hired students to count how many cars went through on a given day. In gasoline stations, he checks the pump meters that show how many gallons have been pumped and looks at invoices to see how many gallons the station purchased. In an automotive repair shop, Trugman considers the number of parts purchased, mechanics employed, cars waiting to be fixed-even the number of times the phones ring--to help quantify for the court the amount of activity and what it would mean for the company's income.

In many cases, no trade organizations exist for truly obscure companies. For example, one court appointed Trugman to value a business that did troubleshooting on ships with steam-powered engines. "Where do you begin to find information?" he asks. The first step was to ask the client about pertinent organizations, seminars or literature. A series of phone calls led Trugman to a company in lower Manhattan that produced a report on the number of steam engines still on the water, by country, over the last 10 years. He found that although diesel engines had made steam engines a dying breed, the business's sales had jumped from roughly $250,000 to over $1 million annually during the Gulf War because U.S. Naval Reserve ships use steam engines. Tracking down information alone on this engagement took between 25 and 30 hours. Other cases involved researching a company that refurbishes the interiors of corporate aircraft and one that installs automatic teller machines. "These are the jobs that can be a real challenge" because of their unique industries, Trugman says. "And if you charge a flat fee, you may not cover the time you spend to do a good job." Trugman's concern is that appraisers won't be able to offer thorough valuations if they set one fee for every engagement.


Trugman describes divorce valuation as a recession-proof business that's open to CPAs prepared to commit time and resources to it. "There's a tremendous amount of opportunity for CPAs willing to obtain the additional education appraisers need," he insists. Besides the appropriate certifications, he also earned a masters degree in valuation sciences in his limited spare time, giving him a solid background when presenting expert testimony.

"Every time I step into court, my credentials are challenged by the other side. Those credentials have to mean something," he explains.

A refocusing of skills is necessary, too, he says, because being a CPA doesn't teach one how to do valuation work and the work appraisers produce is different from most CPAs' reports. "A good appraisal report leaves here with anything from 40 to 80 pages on the economy, the industry, business risk and the valuation theory relied on to draw the conclusions. All of the certifying organizations' standards require this kind of depth." Trugman also believes there's an art to being an expert witness. "I really don't know how good an appraiser I am, because nothing I've appraised has ever actually been sold. I do know, though, when I step into a courtroom, I feel comfortable giving my opinion and I can convince someone in authority I'm right."

He advises it would be difficult to gain the necessary expertise and achieve the required quality to make a part-time valuation practice worthwhile. Unfortunately for those who'd like to jump into a new practice, "cash flow in this business is atrocious," he warns. Although attorneys seek out his services, it is usually their clients who actually retain him. When the client is not the business owner, his or her own cash situation may delay payment indefinitely. Trugman always asks for a 50% retainer and gets a signed engagement letter. Traditional accounting services can help keep a practice afloat in the first years, but valuation business should eventually support itself.


A good first resource for CPAs interested in entering this field, according to Trugman, is the Institute of Business Appraisers (IBA), P.O. Box 1447, Boynton Beach, Florida 33435. The IBA, which focuses mainly on small, closely held businesses, offers seminars and education programs that can lead to accreditation as a certified business appraiser (CBA). Members are entitled to unlimited telephone consultations and the IBA makes an effort to mentor new appraisers. To gain certification, Trugman had to prepare two appraisal reports and pass an examination. The IBA has no experience requirement for the CBA because, says Trugman, the knowledge demonstrated by passing the exam is considered more important than the number of hours in practice.

The American Institute of CPAs also is developing a specialization designation program leading to an accreditation as a business valuation specialist. More information is available from the Institute's management consulting division; phone (201) 938-3503.

Another organization for wouldbe appraisers is the American Society of Appraisers (P.O. Box 17265, Washington, D.C. 20041), the only multidisciplinary appraisal organization. It has a greater focus on midsized to larger companies that may need valuations for actions such as mergers and acquisitions. Its members are involved in everything from business and real estate valuation to the appraisal of antiques and gems. To earn accredited member status, one must have at least two years' full-time appraisal experience, pass written and oral examinations and submit acceptable appraisal reports. An accredited member with a minimum of five years' experience who has fulfilled the educational, examination and appraisal requirements can apply for accredited senior appraiser status.


Trugman's firm today consists of the business valuation practice and a traditional accounting services practice run by his wife and partner, Linda Trugman. They employ one professional, plus two full-time and one part-time clerical and para* professional staff members to help run a highly automated office. He is an aggressive marketer who advertises in law publications, sends direct mail to law firms and speaks frequently. He has bound volumes of his master's thesis, on the equitable distribution value of closely held businesses, which he gives to lawyers and judges to let them know of his expertise.

For those launching new valuation practices, Trugman believes the most important focuses are education and a clear understanding of the client's needs. "The idea is to retain objectivity rather than be the ultimate advocate for your client. Appraisers may believe they should come up with the biggest number possible for a business owner's spouse. The biggest number possible isn't going to do one bit of good if it's not justifiable, because the client will end up in protracted litigation that will never settle."
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Article Details
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Title Annotation:valuing businesses
Author:Dennis, Anita
Publication:Journal of Accountancy
Date:Nov 1, 1992
Previous Article:The new IRS offers in compromise policy.
Next Article:Consulting liabilities.

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