Business valuations are needed for many situations, some for tax, business, marital separation or forensic purposes. These reports can run from 30 to over 100 pages and contain a lot of so-called scientific calculations and supporting data.
Recently I noticed an uptick in valuation requests and want to provide a documented illustration of the wide range of values that can be provided for the same situation. All of these values are contained in a Tax Court case about Michael Jackson's estate. There are many reasons and justifications for each valuation, but I only want to discuss the range of amounts to indicate that determining business valuations is an art rather than a "science," irrespective of the look of the final report that is used to justify a valuation.
Pop legend Michael Jackson died in 2009 at age 50. On his estate's tax return, his executors valued his image and likeness at $2,105. This valuation process is similar to valuing a business, which is a determination of the value, as of a certain date, of the tangible assets and a quantification of the intangible assets, which generally are used to generate sustainable cash flow. This amount was later increased by the executors to $3 million. There were two other assets valued by the estate: Jackson's partial ownership of Sony/ATV Music Publishing, a catalog that included the rights to 175 Beatles songs, and the Mijac music catalog, which owned the rights to music Jackson had written. These were valued at $2.2 million.
The IRS, after an audit, valued Jackson's image and likeness at $161.3 million and the catalog interests at $320.6 million. Notice the "exact" unrounded amounts to the nearest hundred thousand.
The Tax Court ruled that the Jackson's name and likeness should be valued at $4.15 million and the catalog interests valued at $107.35 million. More "exact" unrounded amounts.
While the estate undervalued the assets based on the determination by the Tax Court by about $106 million, the IRS overvalued the assets by $370.4. These are big differences. There were at least seven separate valuations; three by the estate, two by the IRS and two by the Tax Court. There was some reasonableness between the executor's value of Jackson's image and likeness and the court's. There was no reasonableness between the IRS valuations and the court's. Presumably each appraiser was an expert in these types of valuations. If I cared further, I could access the briefs and valuation reports from the Tax Court, but at this point I have no need to expand the time I've already spent on this.
If you want to read the opinion, the citation is
Many clients consider a valuation report to be a commodity looking for the lowest-cost provider. The wide range of valuations in this case (and in many other situations) should indicate that valuations are the result of the personalized and customized consideration of the circumstances and the skill of the appraiser, along with their ability to appropriately apply their experience and not an arithmetic calculation of a bunch of numbers. When clients treat valuations, and many other services, as commodities, I blame the accountant for not communicating the true value of their services, which is considerable. Use this as an example the next time you are told to beat a lower fee.
I hope the above provides some insights into a process that many outside of the valuation practice — and accounting services in general — do not understand.
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