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Summary of Issue
Attorneys representing multiple
family members involved in litigation against each other contacted our
office to request assistance with accounting. The accounting issues
involved were complex and all parties had come to understand that they
needed forensic accounting expertise. With the court's approval, all
parties and their legal representatives agreed to retain Arxis as the
case expert to see if that might facilitate a resolution.
Why the Request?
Several pieces of real estate were
involved in a dispute where the family members had equal ownership
interests in all the property. There were no partnership or operating
agreements. Unfortunately, there were, as a result, several different
expectations of what should have happened as well as different versions
of what had happened over several decades. The one undisputed fact was
that all properties were owned equally, even though not all family
members controlled or even had access to all the properties. The
problem was that over many years the properties were, at various times,
rentals or the primary residence of extended family members. For
properties converted to residences, there was the demand for rent or
other compensation for lost income to the other owners. For rental
properties, there was a demand for full accounting of rent income,
expenses, and the disposition of cash profits.
Arxis Analysis
Current deed, debt, and occupancy
data was initially reviewed. It was immediately apparent that the
recorded property deeds did not reflect the ownership intent of the
parties; there were significant reimbursement claims by at least two of
family members; and nobody had accounting records that were relevant,
complete, or reliable to allow for a full accounting. Further, after
several conference calls, it was clear that most of the family members
had no interest in the cost and effort involved to obtain those
records.
Extensive time was spent
understanding each party's claims and discussing the documents needed
to substantiate the claim. For example, significant improvements and
repairs had been done by individual family members to maintain and
increase the value of properties. They each did it with the expectation
that since all the family benefited, there would be reimbursement.
However, as is typical in informal real estate partnerships, there are
a lot of assets but very little cash to repay partner loans and
reimburse expenses. The family members came to understand that, in the
absence of documented evidence, the court was likely to order the sale
of all the properties with an equal division of the proceeds. Because
of the family legacy represented by the real estate, nobody wanted this
to happen. Still, it was an effort to maintain the involvement of the
family members needed to resolve the dispute.
As a result of these divergent
expectations, inadequate top-level management and incomplete accounting
processes, it became obvious that there would not be a basis for
reliable accounting. In many situations, this would indicate that the
next step would be extensive litigation to remedy the situation.
However, in order to jump-start a
dying attempt to resolve the disputes, Arxis proposed a different and
creative approach to resolving the dispute through our experienced
involvement. A spreadsheet was prepared that projected the financial
results of selling all the properties. In other words, the analysis
answered the question of what would happen in a coordinated liquidation
of all the properties should the court make such an order. Current
values of the properties were used based on appraisals. All known
reimbursement claims were included in the calculation (including notes
indicating which were supported by documents, and those that were
unsubstantiated) with the result showing how much cash each partner
would be due, or owed.
Result
The liquidation projection was panned
by the litigants since none of them wanted to liquidate the properties.
However, the family members and their legal representatives met to
attempt a settlement and the liquidation spreadsheet became the template
used to accomplish a settlement. The individual family members agreed
to divide the properties between them. Once that division was decided,
the calculations on the liquidation spreadsheet were used to calculate
cash due to/from each family member. The result was that none of the
properties were sold, each of the family members obtained ownership of
the property(s) they wanted, and equalization payments were calculated.
Extraordinary litigation costs, as
well as months of heart-wrenching personal time for each of the family
members, were avoided by the pre-trial settlement in this case. It
turned out that projecting the economic results of a court ordering the
sale of all the properties was the linchpin that finally motivated that
settlement.
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A buy-sell agreement needs to be
clear about the method of valuation of the business, the process of
determining the value, who will perform the valuation, who will pay for
the valuation, and the timing of the payments for the stock. Businesses
of all types and sizes need buy-sell agreements, including
privately-held partnerships, LLPs, LLCs, and corporations. Arxis
Financial's valuation specialists provide clients with a
comprehensible valuation that aids attorneys, business owners,
management, and financial planners in decision-making.
The Business Valuation
practice is headed by partner Chris
L. Hamilton, CPA, CFE, CVA. Mr. Hamilton is a Certified Public
Accountant, Certified Fraud Examiner and Certified Valuation Analyst.
He is a licensed life and disability insurance agent and a General
Securities Representative. Mr. Hamilton has published articles in
several publications, and has made presentations at national
conferences, training institutes and seminars on topics including
forensic accounting, fraud and business appraisal.
If you have any questions about Business
Valuation Services for Buy-Sell Agreements, please feel
free to contact
us.
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