Case Study: Strategic Valuation Support in a SARE Chapter 11 Bankruptcy

Background:

A commercial real estate debtor filed Chapter 11 under SARE provisions, defaulting on a $7.8 million mortgage. The asset, a single underperforming retail property, was the debtor’s only income-generating asset. The debtor proposed a reorganization plan asserting full recovery for the secured creditor based on optimistic rental assumptions and an inflated asset valuation.

Lakelet Advisory Group was retained by the senior secured lender to assess the accuracy of the debtor’sprojections and defend against the proposed plan. Our role: deliver defensible analysis that would withstand scrutiny under the Bankruptcy Code.

Solution: Independent Valuation & Financial Forensics

We executed a three-part strategy:

• Fair Market Valuation: Applied market-derived cap rate of 8.25%, in contrast to debtor’s 6.5%, yielding a property FMV of $6.45M versus the debtor’s $8.25M.

• Cash Flow and NOI Analysis: Our audit of the property’s rental income and expenses showed:

  • Net Operating Income (NOI): -$112,000 annually

  • Debtor overstated rents by 18%, understated expenses by 12%

• Plan Feasibility Assessment: We identified that the reorganization plan depended on speculative lease renewals and untenable income projections, failing the feasibility test under §1129(a)(11).

Legal Anchoring and Outcome

Using our findings, counsel for the secured creditor filed a motion under §362(d)(1) and (d)(2) for relief from stay, citing lack of adequate protection and absence of equity. Lakelet Advisory Group’s valuation undermined the debtor’s “equity cushion,” showing that liabilities exceeded the realistic FMV of the property.

Our experts provided courtroom testimony that was instrumental in:

• Dismissing the reorganization plan• Granting foreclosure authority to the lender

• Achieving resolution within 7 months

Key Financial Table

Note: Forensic review showed projected rents exceeded market norms by 18%, with OPEX understated by 12%.

Timeline of Events

• Month 0: Bankruptcy Filing (SARE)

• Month 1: Lakelet Engaged by Creditor

• Month 2: Valuation Delivered

• Month 4: Testimony in Relief from Stay Hearing

• Month 5: Foreclosure Granted

• Month 7: Case Resolved

SARE Case Characteristics (Sidebar)

Single Asset Real Estate (SARE) cases under the Bankruptcy Code are:

• Defined under 11 U.S.C. §101(51B)

• Involve one real property with limited business operations

• Subject to expedited plan filing and relief from stay timelines

Creditors in these cases must act swiftly with robust valuation support to contest overreaching reorganization proposals.

Why Lakelet Advisory Group

For over 20 years, Lakelet Advisory Group has delivered sophisticated valuation and financial forensics services in bankruptcy and restructuring matters. Our firm brings:

• Proven results in high-stakes real estate disputes

• Court-tested valuation methodologies

• Deep experience in cross-jurisdictional insolvency matters

If you represent secured creditors in SARE or distressed real estate matters, our valuations can be the difference between recovery and write-down.

Contact Lakelet Advisory Group for expert support that stands up in court.

Selling a Company

There are many different ways of selling a company. Choosing a method may depend on the type of business, the goals of the seller, or the preferences of the buyer. Here are some common methods for selling a company:

Sale of the Company’s Shares: This is when the seller transfers all or some of the ownership shares of the company to the buyer, who then becomes the new owner of the company. This method is simpler and faster than a sale of assets, as it does not require the transfer of individual assets and liabilities. However, it also exposes the buyer to more risks, such as hidden liabilities, tax issues, or legal disputes.

Pros

• Simplicity and Speed: Faster and simpler transfer of ownership

• Ease of Transition: Current management structure and employees usually remain intact

Cons

• Risks: Buyer assumes existing liabilities, potential legal issues, and hidden debts

• Limited Control: Limited control over individual assets and liabilities

Sale of the Company’s Assets: This is when the seller sells the individual assets and liabilities of the company to the buyer, who then uses them to operate a new or existing business. This method gives the buyer more flexibility and control over what they are acquiring and reduces the risks of inheriting unwanted liabilities or problems. However, it also involves more complexity and costs, as it requires the valuation and transfer of each asset and liability and may trigger tax consequences for both parties.

Pros

• Flexibility: Buyer can pick and choose specific assets, avoiding unwanted liabilities

• Clear Valuation: Easier valuation of individual assets

Cons

• Complexity: Involves detailed valuation and transfer of each asset and liability

• Cost: More expensive due to legal and valuation expenses

Merger or Acquisition: This is when two or more companies combine their businesses into one entity, either by merging their shares or assets, or by one company buying out another. This method can create synergies and economies of scale, increase market share and competitiveness, and diversify products and services. However, it also involves challenges such as integration issues, cultural differences, regulatory approvals, and potential conflicts among stakeholders.

Pros

• Synergies: Can create synergies, increase market share, and diversify products/services

• Competitive Edge: Enhances competitiveness and market presence

Cons

• Challenges: Integration challenges, regulatory approvals, and potential stakeholder conflicts

• Cultural Differences: Differences in organizational culture can lead to challenges

Management Buyout: This is when the existing management team of a company buys out the ownership shares from the current owner, usually with the help of external financing. This method can preserve the continuity and culture of the business, motivate, and reward the management team, and avoid disruption to customers and suppliers. However, it also requires a high level of trust and cooperation between the owner and the management team, a fair valuation of the business, and a feasible financing plan.

Pros

• Continuity: Preserves business continuity and company culture

• Motivation: Motivates existing management team and key employees

Cons

• Financing: Requires substantial external financing

• Valuation: Needs a fair valuation process to satisfy both parties

Employee Stock Ownership Plan (ESOP): This is when a company sets up a trust that buys and holds its shares for the benefit of its employees, who then become partial owners of the business. This method can provide tax advantages for both the seller and the company, increase employee loyalty and productivity, and facilitate succession planning. However, it also entails administrative costs and complexity, fiduciary responsibilities for the trustees, and dilution of ownership for existing shareholders.

Pros

• Loyalty: Increases employee loyalty and productivity

• Succession Planning: Facilitates succession planning and smooth transition

Cons

• Complexity: Involves administrative complexity and fiduciary responsibilities

• Dilution: Dilutes ownership for existing shareholders

Strategic Sale: This involves selling your company to another company in the same industry. Strategic buyers are often willing to pay a premium because they see synergies and opportunities for growth or cost savings by acquiring your business. These buyers could be competitors, suppliers, or companies in related industries.

Pros

• Premium Pricing: Strategic buyers often pay a premium due to perceived synergies

• Industry Expertise: Buyers understand the industry, which can lead to smoother transitions

Cons

• Limited Pool: Limited to companies in the same or related industries

• Sensitivity: Sensitive information might be shared with competitors

Financial Sale: Private equity firms or investment groups may be interested in acquiring your company purely for its financial returns. They often buy companies with the intention of improving their performance and selling them at a higher valuation in the future.

Pros

• Financial Expertise: Buyers can optimize the company’s financial performance

• Profitable Exit: Potential for significant financial gains

Cons

• Ownership Changes: Likely significant changes in company management and culture

• Exit Pressure: Pressure to meet financial targets can affect company decisions

IPO (Initial Public Offering): If your company is large enough and meets the regulatory requirements, you can take it public by offering shares on a stock exchange. This allows you to raise capital from public investors and gives you liquidity.

Pros

• Capital Infusion: Raises significant capital by selling shares to the public

• Liquidity: Provides liquidity to existing shareholders

Cons

• Regulatory Compliance: Strict regulatory requirements and ongoing compliance

• Market Volatility: Vulnerability to market fluctuations affecting stock prices

Brokerage Services: You can hire a business broker or investment banker to help you find potential buyers and negotiate the sale on your behalf. These professionals can provide valuable guidance throughout the process.

Pros

• Professional Guidance: Benefits from the expertise of professionals

• Networking: Brokers have industry connections for potential buyers

Cons

• Cost: Involves fees and commissions, affecting overall proceeds

• Dependency: Relies on the broker’s effectiveness in finding suitable buyers

Online Marketplaces: There are online platforms and marketplaces where you can list your business for sale. These can be effective for smaller businesses and startups.

Pros

• Accessibility: Provides a wide reach to potential buyers

• Cost-Effective: Generally lower cost compared to traditional methods

Cons

• Quality Control: Quality of buyers may vary; careful screening is necessary

• Limited Scope: May not be suitable for larger, more complex businesses

Direct Sale: You can also approach potential buyers directly, especially if you already have contacts or relationships in your industry. This approach requires careful negotiation and due diligence.

Pros

• Relationship-Based: Relies on existing industry relationships

• Negotiation Control: Direct involvement in negotiation processes

Cons

• Resource-Intensive: Requires significant time and effort for due diligence

• Limited Reach: Limited to existing industry connections

Each method has its own advantages and challenges. It is essential to carefully evaluate these factors and seek professional advice before making a decision. These are some of the most common methods of selling a company, but there may be other options depending on your specific situation. You should consult with your team of advisors before deciding on the best method for your business.

High-Income Valuations, Maintenance Caps & The Grunfeld Constraint

Divorce cases involving high-income spouses, especially those with businesses, professional practices or high future earning potential, pose special valuation and maintenance challenges. Below we analyze the critical interplay among business valuations, statutory income caps for maintenance, and the doctrine arising from Grunfeld v. Grunfeld that seeks to prevent “double-dipping.” Understanding these dynamics is essential to counsel clients accurately and structure fair, defensible settlements.

The Challenge of High-Income Valuations in Divorce

When one spouse owns a business or a professional practice (e.g., a law firm, medical practice, or other high-earning enterprise), the business may constitute a major marital asset subject to equitable distribution. Valuation typically uses one or more methods: asset-based, market-based, or, most commonly in professional practices, an income approach that capitalizes excess earnings or projected future cash flows.[1]

In that context, the difference between the spouse’s actual earnings and what would be considered “reasonable compensation” (i.e., what a non-owner professional with comparable credentials and in similar geography would earn) is often attributed to the business as “owner’s profits” or goodwill. That surplus becomes part of the business value and thus part of the marital estate subject to division.[2]

However, this approach can trigger serious issues if not handled carefully, particularly when maintenance (alimony) or support calculations also consider the spouse’s high income. Without proper adjustments, the same earnings (or future earning potential) can be counted twice: once in valuing the business, and again in determining maintenance or support payments. This is the crux of the “double-dipping” risk.[3]

Statutory Income Caps and Their Limits in High-Income Divorces

Many jurisdictions, including, for example, under state maintenance/child-support statutes, impose income “caps” for calculating guideline maintenance or child support. In such cases, only income up to a certain threshold is plugged into the statutory formula; any excess income becomes subject to judicial discretion rather than strict formulaic calculation.[4]

For example, in a particular state’s recent update: the maintenance-payor income cap has been raised to $228,000. Income above that cap is not automatically considered under the guideline

formula: instead, a court may choose (based on relevant statutory factors) to award additional maintenance.[5]

The result: in high-income divorces, the statutory formula often serves only as a baseline. Courts frequently rely on discretion, considering factors such as standard of living during the marriage, each spouse’s future earning capacity, age, health, and contributions to the marriage.[6]

Thus, in such circumstances, relying solely on statutory formulae without deeper financial analysis may understate or misstate the appropriate maintenance or support award.

The Grunfeld Doctrine: Avoiding the “Double-Dip”

The landmark case Grunfeld v. Grunfeld highlighted and addressed this precise problem. There, the spouse’s law practice and professional license were valued as marital property, but the court nonetheless awarded maintenance based on the husband’s projected future earnings, leading to a double counting of the same income stream.[7]

Specifically, the court recognized that once a spouse’s future income had been capitalized into an asset (such as a business or professional license) for equitable distribution, that portion of income should not, for principle of fairness, also form the basis for maintenance.[8]

In practical terms, under Grunfeld:

• Income used (or anticipated) in valuing a business or professional license should be excluded when calculating maintenance or support to avoid awarding the same benefit twice.[9]

• Courts should carefully trace the income streams: distinguishing “reasonable compensation” (which may be a legitimate income) from “excess earnings” (which may already be capitalized into the business value).[10]

• Any maintenance or child support award should be structured such that it does not effectively duplicate what the non-owner spouse receives through equitable distribution of the asset.[11]

Failure to apply Grunfeld’s principle can lead to awards that over-compensate the non-owner spouse at the expense of fairness and equitable division.

Why This Matters for High-Income Divorce Litigation Strategy

For divorce attorneys representing either spouse in a high-income case, especially where a business, professional practice or license is involved, the interaction among business valuation, maintenance caps, and Grunfeld principles must guide both valuation strategy and settlement negotiation. Key takeaways:

• Order of analysis matters: First, value the business or professional practice using appropriate valuation methods and determine what portion of future earnings is capitalized. Then, evaluate maintenance/support obligations excluding capitalized income to avoid double-counting.

• Document assumptions clearly: Any valuation report or expert testimony should clearly state assumptions (e.g., “reasonable compensation” vs “excess earnings”) and provide a breakdown of which earnings are being capitalized. That clarity supports a credible argument under Grunfeld.

• Anticipate judicial discretion when caps are exceeded: Statutory caps provide a starting point, not a ceiling or guarantee. In high-income cases, courts often look beyond the formula. Having a robust valuation and factual grounding enhances leverage.

• Negotiate with holistic view: Settlement offers should account for both the present value of business interests and realistic maintenance/support expectations, avoiding duplicative awards.

Conclusion

High-income divorces present complex financial issues that standard formulas often cannot adequately address. By integrating rigorous business valuation methodology with legal principles like those articulated in Grunfeld, practitioners can structure equitable and defensible outcomes that serve both the asset-division and support objectives of the court.

For clients with substantial business or professional assets, early engagement with qualified valuation experts – and a clear strategy for how valuations, maintenance caps and dispositional awards will interact – is essential.

[1] https://farzadlaw.com/divorce-business-valuation?

[2] https://law.justia.com/cases/new-york/court-of-appeals/2000/94-n-y-2d-696-0.html?

[3] https://leeandrivers.com/the-double-dipping-concept-in-business-valuation-for-divorce-purposes/?

[4] https://www.petroskelaw.com/blog/2024-2026-income-caps-for-new-york-child-support-and-maintenance/

[5] https://keildivorcelaw.com/blog/f/what%E2%80%99s-up-with-child-support-spousal-maintenance-caps?

[6] https://www.longislandfamilylawandmediation.com/determining-spousal-maintenance-in-new-york-divorces-cases-involving-high-income-earners/

[7] https://law.justia.com/cases/new-york/court-of-appeals/2000/94-n-y-2d-696-0.html

[8] https://case-law.vlex.com/vid/grunfeld-v-grunfeld-886578130?

[9] https://law.justia.com/cases/new-york/court-of-appeals/2000/94-n-y-2d-696-0.html

[10] https://law.justia.com/cases/new-york/court-of-appeals/2000/94-n-y-2d-696-0.html?

[11] https://caselaw.findlaw.com/court/ny-supreme-court/1188188.html

Narrative: ESOP vs. “Normal” Company Valuation Outcomes

While ESOP-owned companies and non-ESOP companies are generally valued under the same fair market value (FMV) standard, the resulting conclusions can differ materially due to structural, economic, and regulatory factors inherent to ESOP transactions.

In a conventional valuation context, the hypothetical buyer universe includes both strategic acquirers and financial sponsors, and therefore implicitly reflects the highest and best use of the business. Strategic buyers, in particular, may incorporate expected synergies—such as cost savings, revenue enhancement, or market consolidation—which can support premium valuation multiples. Private equity buyers, while not paying for synergies to the same degree, often utilize optimized leverage structures to enhance returns, supporting competitive pricing.

In contrast, an ESOP transaction is fundamentally different. The buyer is not a market participant in the traditional sense, but rather a trust acting on behalf of employees, subject to ERISA fiduciary obligations. As such, the ESOP must pay no more than adequate consideration, interpreted as fair market value under a prudent and defensible process. This eliminates the influence of strategic synergies and constrains the valuation to what a financial buyer with limited leverage capacity can support.

Additionally, ESOP-owned companies introduce unique economic considerations that directly affect value. One of the most significant is the repurchase obligation, which requires the company to buy back shares from departing employees. This obligation functions as a long-term cash flow claim, effectively reducing the free cash flow available to service debt or distribute value, and therefore placing downward pressure on valuation.

Conversely, ESOP structures—particularly S-corporation ESOPs—benefit from a substantial tax advantage, as the ESOP-owned portion of the company is generally exempt from federal income tax. This increases after-tax cash flow and, in theory, enhances value. However, in practice, this benefit is often only partially capitalized in valuation due to fiduciary conservatism and ongoing regulatory scrutiny.

Further differences arise in the treatment of control and marketability. Although ESOPs frequently acquire controlling interests, the absence of a liquid external market for shares necessitates consideration of a discount for lack of marketability (DLOM). At the same time, any control premium must be carefully justified and is often tempered or offset by the lack of liquidity.

Finally, ESOP valuations are influenced by a heightened emphasis on defensibility. Given the potential for Department of Labor (DOL) review and litigation, valuation assumptions—such as projections, discount rates, and terminal values—tend to be more conservative, further contributing to differences in outcome relative to a typical market-based valuation.

Taken together, these factors generally result in ESOP valuations that are lower than strategic transaction values and often comparable to or modestly below private equity valuations, depending on the specific facts and circumstances.

Illustrative Valuation Comparison

Assumptions:

●      EBITDA: $10.0 million

●      Identical underlying business across scenarios

Summary Insight

The divergence in valuation outcomes is best understood as a function of buyer-specific constraints and structural economics, rather than differences in underlying business performance.

In effect, a traditional valuation reflects what the business could command in a competitive market, whereas an ESOP valuation reflects what a fiduciary-bound, financially constrained buyer can prudently pay, given regulatory obligations and long-term sustainability considerations.

Case Study: Arbitration Support Valuation of Medical Device Intellectual Property

Client: Confidential

Role: Accredited, Independent Business Valuator(Engaged for Litigation Support & Expert Testimony)

Valuation Date: May 20, 2025

Background

Lakelet Advisory Group LLC was engaged as an accredited, independent business valuator in an arbitration matter concerning the fair market value and contested ownership of patented medical technology. The intellectual property related to a minimally invasive spinal stabilization implant that had secured FDA clearance and gained strong commercial traction in the U.S. market.

The dispute involved claims from a former consultant asserting co-inventorship and seeking participation in the economic value of the IP through equity or royalty interests. The matter proceeded to binding arbitration, requiring formal valuation and expert testimony.

Our Role

Lakelet Advisory Group was retained by legal counsel for the respondent to perform an independent valuation of the subject intellectual property, distinct from the enterprise value of the company. We prepared a detailed valuation report, and our Managing Director served as the testifying expert witness, defending our conclusions throughout the arbitration hearing.

Valuation Methodologies Considered and Applied:

1. Relief from Royalty Method:

   Modeled a hypothetical license of the subject IP to a third party, using industry benchmarks from comparable orthopedic and Class III medical device transactions. Royalty rates were adjusted to reflect regulatory status, exclusivity, and anticipated commercial reach, including global distribution rights.

2. Multi-Period Excess Earnings Method (MPEEM):

   Captured the net earnings attributable specifically to the patented device, after allocating returns to contributory assets such as workforce, tangible assets, and working capital. This method was instrumental in isolating the value of the IP given its central role in the company’s product line.

3. Cost Approach (Used as a Reasonableness Check):

   Considered historic R&D costs, FDA regulatory expenditures, and clinical trial investments to corroborate the income-based value conclusion.

4. Market Approach (Used for Support):

   Surveyed relevant IP-related M&A and licensing transactions. While informative, variability limited direct application.

Key Value Driver – International Market Opportunity

A major factor in the valuation was the IP’s scalability in international markets, with strategic distribution plans underway for Europe, Australia, and select Asia-Pacific regions. Lakelet Advisory Group, having worked in 34 countries, brought a global perspective to the valuation process. Our analysis incorporated international pricing models, regulatory approval timelines, reimbursement schemes, and market-entry risks. These global opportunities added significant upside potential to projected cash flows and materially elevated the concluded IP value.

Valuation Conclusion

The fair market value of the patented spinal device was determined to be $45.6 million as of May 20, 2025, reflecting both strong domestic performance and the significant global market expansion opportunity.

Expert Testimony & Outcome

In addition to preparing the expert report, our Managing Director testified before the arbitration panel, defending the firm’s findings and explaining the international value drivers. The panel accepted our valuation conclusion as credible and well supported. The matter was resolved through a structured financial settlement based on the $45.6 million value conclusion.

Firm Credentials

Our Managing Director currently serves as Chair of the NYSSCPA Business Valuation & Litigation Support Committee and previously chaired the Bankruptcy & Restructuring Committee for six years. These leadership positions reflect Lakelet Advisory Group’s authority and credibility in financial dispute engagements. With valuation and advisory experience in 34 countries, we offer a rare blend of global insight and forensic rigor.

Key Takeaway

This engagement demonstrates Lakelet Advisory Group LLC’s ability to value high-impact, internationally scalable intellectual property in contentious arbitration settings. Our team delivers conclusions grounded in accepted methodologies and defends them effectively through expert testimony—supporting clients in navigating complex, high-stakes disputes with confidence.

DLOM & Minority Discounts in NYS Divorce Business Valuations

When valuing a professional service business for equitable distribution in a New York divorce, two key valuation discounts often come into play:

1. Discount for Lack of Marketability (DLOM): Applied when a business interest is illiquid and cannot be easily sold.

2. Minority Discount (Lack of Control): Applied when a spouse owns a non-controlling interest in the business.

New York courts do not apply these discounts automatically and instead analyze them on a case-by-case basis. Below is a deep dive into these concepts, supported by NYS case law.

Discount for Lack of Marketability (DLOM)

DLOM reflects the reduced value of an ownership interest due to the difficulty of selling it in the marketplace. Professional service businesses (law firms, medical practices, accounting firms) often have restrictions on ownership (e.g., must be a licensed professional), making them highly illiquid—a key reason for applying DLOM.

New York Case Law on DLOM

• Case: Beway v. Beway, 215 A.D.2d 575 (2d Dep’t 1995)

  • Approved DLOM in divorce valuations, ruling that the court must determine whether the business is easily transferable or highly restricted.

• Case: Giaimo v. Vitale, 101 A.D.3d 523 (1st Dep’t 2012)

  • Held that DLOM should not be excessive and must be supported by economic evidence.

Factors Affecting DLOM in NY Divorce Cases

• Industry & Marketability: Professional firms have ownership restrictions and may lack a ready market, supporting DLOM.

• Restrictions on Sale: Many partnerships do not allow non-professionals to own shares, making the interest harder to sell.

• Time to Sell: If selling an interest would take months or years, courts may apply a higher DLOM.

Typical DLOM Percentages for Professional Firms

• Medical Practices – 20% to 35% (high restrictions on ownership transfer)

• Law Firms – 25% to 40% (often require partner vote for new owners)

• Accounting Firms – 20% to 30% (varies based on client retention risk)

Courts may reject excessive DLOMs if they find the valuation expert’s assumptions too speculative.

Minority Discount (Lack of Control Discount)

A minority discount accounts for the reduced value of a non-controlling interest in a business because the owner cannot influence operations, salaries, or distributions.

New York Case Law on Minority Discounts

• Case: Ferolito v. AriZona Beverages USA, LLC, 119 A.D.3d 642 (2d Dep’t 2014)

  • Minority discounts may apply when a spouse lacks control over business decisions.

• Case: Windsor v. Windsor, 295 A.D.2d 233 (1st Dep’t 2002)

  • Rejected an excessive minority discount, stating that the spouse still held significant rights in the business.

Factors Affecting Minority Discounts

• % Ownership: If the spouse owns less than 50%, courts may allow a minority discount.

• Voting Rights: If the spouse cannot influence major business decisions, a discount is more likely.

• Profit Distributions: If the business retains profits without owner approval, courts may consider a discount.

Typical Minority Discounts for Professional Practices

• Medical or Law Firms (Non-Equity Partner) – 15% to 30%

• Minority Ownership in a CPA Firm – 10% to 25%

• Small LLC or Partnership Interests – 15% to 35%

Courts often apply lower minority discounts in professional firms because owners still benefit from the business’s goodwill and earnings.

NY Courts’ Approach: When Are DLOM & Minority Discounts Applied?

New York courts do not automatically apply these discounts and instead evaluate the business’s control, marketability, and ownership structure.

• Full Ownership (No Discount): If the spouse owns 100% of a firm, no minority discount applies.

• Restricted Ownership (Higher DLOM): If ownership is restricted (e.g., only licensed professionals can buy in), a higher DLOM may be used.

• Passive Interest (Higher Minority Discount): If the spouse cannot control business operations, a minority discount is more likely.

Example Applications in NYS Divorce Cases

Scenario 1: Small Law Firm, Sole Practitioner

• Spouse owns 100% of the firm (solo law practice).

• No minority discount applies since they control the firm.

• A DLOM of ~30% may apply due to lack of marketability (hard to sell to non-lawyers).

Result: Business valued at $500,000, reduced by 30% DLOM → Final Value = $350,000

Scenario 2: CPA Firm, 30% Ownership

• Spouse owns 30% of an accounting firm with two other partners.

• Spouse has no decision-making control (minority interest).

• A 15-20% minority discount may apply.

• A 20% DLOM may apply if partnership transfer restrictions exist.

Result:​

Initial Value = $400,000​

Applying 15% Minority Discount = $340,000​

Applying 20% DLOM = $272,000

Final Valuation for Divorce = $272,000

Scenario 3: Medical Practice Partnership (50/50 Ownership)

• Spouse is a 50% owner in a medical practice.

• The practice cannot be sold to non-doctors → Supports a higher DLOM.

• Spouse shares control → No minority discount applies.

Result: DLOM likely applied (~25%-30%) but no minority discount due to shared control.

Key Takeaways for NY Divorce Cases

1. DLOM applies when an ownership interest is illiquid, typically between 20% to 40% in professional firms.

2. Minority discounts apply when a spouse lacks control, typically between 10% to 30%, but are scrutinized by courts.

3. New York courts do not automatically accept these discounts and require expert valuation analysis.

4. Excessive discounts may be challenged if they unfairly reduce the marital asset value.

5. Professional firms with ownership restrictions justify higher DLOMs.

Business Valuation: “Things Are Not Always Quite So Simple as Black And White.”

Valuing an enterprise can be a challenging endeavor. Not all valuation methods are created equal. In practice, some methods – even common ones – do not result in an intrinsic enterprise value. Whether you are exploring a strategic transaction, planning for the growth of your company, or simply engaging in strategic planning, consider the valuation basis, its accuracy, and its application to ensure you obtain a value-added appraisal.

Executives dedicated to maximizing shareholder value gravitate toward discounted-cash-flow (DCF) analyses as the most accurate and flexible method for valuing projects, divisions, and companies. Any analysis, however, is only as accurate as the forecasts it relies on. Errors in estimating the key components of corporate value - components such as a company’s return on invested capital (ROIC), its growth rate, and its weighted average cost of capital - can lead to mistakes in valuation and, ultimately, to strategic errors.

Somehow the EBITDA multiple has become a de facto standard for many small and mid-size entity assessors, perhaps due to its relative ease in understanding and its application. However, this should not be taken to assume the accuracy of its valuation and/or the comparability of value between companies; an inherent assumption when relying largely on an EBITDA multiple.

EBITDA as a measure of performance and, by extension enterprise value, is popular because it supposedly overcomes the problem of accounting differences. This is partly true, in that the measure is unaffected by differences in depreciation methods, goodwill accounting, and deferred tax. Although there are other accounting concerns (revenue and cost recognition issues, pensions accounting, etc.) that do affect EBITDA, theoretically, the EBITDA calculation provides a useful and comparable measure. A crucial failing of EBITDA, however, is that it ignores the very real costs of capital expenditure and taxation that should (and do) affect value.

Let us assume that even if the aforementioned could be satisfied, the major issue with this simplistic method of valuation is that it assumes the entities are comparable. Multiples are an average of the entities of similar size in that industry. Assuming that your entity has the identical make-up of products, future opportunities, financial support, management expertise, customer base, ad infintum – as the “average,” the valuation results would simply summarize that the average entity in that specific industry historically had a valuation of said amount. The EBITDA valuation result may be a valid benchmark/reasonableness test for a more comprehensive valuation. However, by itself, EBITDA multiples provide minimum substantive value. Is this entity you are attempting to value “average” in all regards?

Probate Business Valuations

Probate business valuations are critical when a deceased person’s estate includes a business or business interest. Accurately determining the value of a business during probate presents unique challenges, and the outcome can significantly influence the estate settlement process. One major obstacle is the uncertainty surrounding the business’s future, especially if there is no clear succession plan in place. Estimating future earnings becomes difficult, particularly when the deceased was a key player in the business’s operations.

Another challenge is the valuation of intangible assets like goodwill or intellectual property, which can be difficult to quantify and may lose value after the owner’s passing. These complexities are often compounded by potential conflicts among heirs—some may wish to continue operating the business while others prefer liquidation, leading to disagreements over which valuation method to use.

When the deceased held a minority interest in the business, determining appropriate discounts for lack of control becomes subjective and further complicates the process. Additionally, incomplete financial records or poor bookkeeping can make it hard to accurately assess the true value of the business.

The valuation method selected—whether market, income, or asset-based—can also have a major impact on the final assessment. Factors such as estate taxes, market conditions, and the timing of the valuation add further layers of complexity. Because of these challenges, it’s crucial to work with experienced professionals who can provide a thorough, unbiased valuation.

At Lakelet Advisory Group, we specialize in probate business valuations and understand the intricacies involved. Our team offers expert guidance through every step of the process, ensuring a fair, precise valuation that meets both legal and tax requirements while helping to minimize potential disputes. Reach out to Lakelet Advisory Group for the expertise you need to navigate the probate valuation process smoothly.

Cash Flow Improvements

At Lakelet Advisory Group, we believe that “cash is king” because the ultimate success measurement is the amount of cash generated. When looking at lower-middle market companies, measuring cash is paramount.

The key processes/metrics Lakelet Advisory Group recommends are:

• Fully understanding your break even from a cash flow perspective. This includes expenditures, revenues, timing, debt service, seasonality, etc.

• Often, too much focus by entrepreneurs is on the profit and loss statement. The key to successful cash flow is optimizing the balance sheet. The balance sheet is more complex, but it more accurately reflects the overall health of a company. For example, the balances themselves are key, but it is the timing that plays a significant role. How quick are the inventory turns, turnover of account receivables, etc.

• Lease, don’t buy

• Enforce Payment Discipline. Do not set a precedent of allowing your money to be abused

• Require a down payment on projects so that your customers fund the project, not you

• You may even have to “fire” a few non-value-added customers/clients;

• Evaluate Your Terms. Can you get paid in 15 days, not 30 days? Can you pay in 45 days not, 30 days?

• Pay commissions and bonuses on cash collected vs. revenue earned

• As Benjamin Franklin stated, “a penny saved is a penny earned.” Be creative in expenditures – not cheap.

Lakelet Advisory Group has noted that the lack of understanding of cash flow vs. profitability is a major challenge for the lower-middle market entities. When your financial projections are created on an annual basis, it is important to generate a company balance sheet statement with the projections. If you fail to generate financial projections…always remember that “failure to plan is a plan to fail.”

IRS Issues with Estate Business Valuations

Valuing an estate business for tax purposes can be particularly challenging, and there are several IRS issues that need to be considered in the process. Here are some of the main issues:

• Estate tax valuation: When an individual passes away, the IRS requires an estate tax return to be filed, and the value of the estate assets must be determined. Valuing an estate business for estate tax purposes can be particularly challenging due to the unique factors associated with the business. The IRS has strict rules and regulations governing estate tax valuations, and any errors or inconsistencies can result in penalties and additional taxes.

• Gift tax valuation: If an individual gives away all or part of their interest in an estate business during their lifetime, the IRS requires that the gift be valued for gift tax purposes. The valuation process is similar to that of an estate tax valuation, and the IRS closely scrutinizes gift tax valuations to ensure that they are accurate and comply with the relevant tax laws.

• Business ownership and transfer: Estate businesses often have complex ownership structures, and the transfer of ownership can be subject to a range of tax implications. For example, if the estate business is a partnership or LLC, the transfer of ownership interests can trigger tax consequences, and the valuation of the business will play a crucial role in determining the tax liability.

• Valuation methods: The IRS provides several valuation methods for estate businesses, including the income approach, market approach, and asset-based approach. Choosing the most appropriate method for a particular business can be challenging, and the IRS requires that the chosen method be consistent with the underlying facts and circumstances of the business.

Overall, valuing an estate business for tax purposes requires a thorough understanding of the relevant tax laws and regulations, as well as the unique factors associated with the business. It is recommended to work with a qualified and experienced tax professional to ensure an accurate and compliant valuation.

Why is an Estate Business Valuation Different From a "Normal" Business Valuation?

An estate business valuation can be different from a normal business valuation for several reasons:

• Purpose: The purpose of a business valuation for estate tax purposes is different from a normal business valuation. In estate planning, the valuation is used to determine the value of the decedent’s assets and liabilities for estate tax purposes, while in a normal business valuation, the valuation is typically used to determine the fair market value of a business for sale or merger.

• Timeframe: The timeframe for an estate business valuation may be different from a normal business valuation. In an estate business valuation, the valuation date is typically the date of the decedent’s death or an alternate valuation date that is six months after the date of death. This can result in differences in the valuation due to changes in the business’s financial performance and market conditions.

• Discounts and premiums: Discounts and premiums may be applied differently in an estate business valuation compared to a normal business valuation. In an estate business valuation, discounts for lack of control and lack of marketability may be applied to reflect the fact that the business interest being valued may not be marketable and may not provide the same level of control as a controlling interest. Additionally, premiums for control may be applied if the estate owns a controlling interest in the business.

• Tax laws: The tax laws governing estate taxes may result in differences in the valuation between an estate business valuation and a normal business valuation. For example, the estate tax laws may allow for certain deductions or exemptions that would not be available in a normal business valuation.

Overall, an estate business valuation takes into account the unique circumstances of the estate and the estate tax laws, which can result in differences from a normal business valuation.

Unrealistic Valuations

Warren Buffett said it best: “Price is what you pay, value is what you get.”

One of the biggest struggles with selling in the lower to middle market is business valuation expectations. The top reason for deals not closing in 2022 was due to a valuation gap in pricing.

Of those transactions that didn’t close due to a valuation gap in pricing, approximately 69% had a valuation gap in pricing between 11% and 30%. Sellers almost always feel their business is worth far more than what the market will bear. Here are a few basic reasons explaining this valuation gap:

• The owner is valuing assets, not cash flows. Investors are not concerned as to what you paid for your assets. A buyer is focused on the cash that the business can generate and its risks. This is especially true with service and technology companies.

• Too often, the owner is not optimizing their value/opportunities due to lack of preparation. A small investment in preparing for the transaction can more than pay for itself if properly executed.

• Owner’s attachment to the Company. If the Company has paid your salary, the children’s tuition, etc., you place more value on the enterprise and may not appreciate the risks associated with the business from an outsider’s perspective.

• Valuations based on the rare astronomical business successes. Examples include Instagram, Facebook and Apple - these entities are so far outside the realm of th norm that any meaningful comparison is ludicrous.

• Private Equity Firms and the relatively low cost of capital have generated an unprecedented frenzy over competing for the companies with an EBIDTA greater than $5 million.

• The owner is equating the valuation based on wants/needs, not on a fair market value.

Before deciding to sell your business, hire an independent, accredited business valuator to provide you with a reality check as well as means of improving the future price.

The Hidden Dangers of Relying Solely on Business Valuation Multiples

Business valuation multiples—like EV/EBITDA, P/E, and Price/Sales—are among the most used tools in finance. They’re quick, easy to communicate, and widely accepted. But while these metrics can offer a useful snapshot, relying solely on them is not only simplistic—it can be dangerously misleading. In valuation, shortcuts are costly. Multiples can guide you, but if you rely on them alone, you’re flying blind.

They Ignore Company-Specific Risks

Valuation multiples assume a level of comparability that rarely holds true in practice. Each company faces its own unique risk profile, including:

• Customer concentration

• Competitive positioning

• Geographic exposure

• Legal and regulatory environments

• Operational resilience

For instance, two companies might trade at similar multiples, yet one could be exposed to a single volatile market while the other has a diversified global footprint. Multiples alone can’t capture these nuances, which can materially impact long-term value.

No Assessment of Management Quality

One of the most overlooked flaws in using only multiples is their complete disregard for management—arguably one of the most critical value drivers in any business.

Strong leadership can be the difference between a company that scales efficiently and one that burns through capital. Strategic clarity, executional discipline, capital allocation, and culture all start at the top. Yet valuation multiples assign zero quantified value to the team steering the ship.

Whether you’re investing in a startup or acquiring a mature business, failing to assess management is a major blind spot.

They Reflect Market Sentiment, Not Intrinsic Value

Because multiples are typically derived from publicly traded peers, they’re inherently reflective of market sentiment—which can be volatile, biased, or outright irrational.

Valuing a private company based on inflated public comps during a bull run, for example, could result in overpaying by a wide margin. Multiples reflect what the market is currently willing to pay, not what a business is fundamentally worth.

They Assume Peers Are Truly Comparable

Even within the same industry, companies can vary drastically in terms of:

• Scale

• Growth rates

• Profitability

• Vendor relationships

• Capital intensity

• Customer base

Applying an average sector multiple to a business without deeply understanding these differences can lead to mispricing. True comparability requires more than a shared NAICS code.

They Overlook Capital Structure and Cash Flow Nuances

Metrics like EV/EBITDA ignore critical elements such as:

• Capital expenditures

• Changes in working capital

• Tax structures

• Debt levels

Two businesses may have identical EBITDA figures, but vastly different free cash flow profiles. Similarly, a highly leveraged firm may appear attractively priced on an EV basis, while hiding significant balance sheet risk.

They Strip Away Strategic and Narrative Context

Multiples reduce complex businesses to simple math. But valuation is more than arithmetic—it’s strategy, story, and judgment. A company’s future prospects, positioning, vision, and innovation pipeline can’t be expressed in a single number.

Conclusion: Use Multiples, But Don’t Be Blinded by Them

Multiples are useful—fast and standardized—but they are no substitute for real analysis. They ignore management quality, gloss over risk, and fail to capture what makes each business unique. For a credible, defensible valuation, multiples should be just one piece of a broader toolkit that includes:

• Discounted cash flow (DCF) analysis

• Scenario modeling

• Strategic due diligence

• Management and operational assessments

Valuing Intellectual Property

Lakelet Advisory Group’s business valuation focus is challenged entities and complex intellectual property (“IP”) assets. Valuing early stage, technology-based intellectual property assets is challenging, in large part due to the difficulty in incorporating the effects of risk and uncertainty inherent in these assets into their valuation. Technology-based intellectual property assets, usually protected as patents and/or trade secrets, are typically valued using the same three common approaches as are used to value businesses or other assets. These approaches include:

1. Income approach

2. Market approach

3. Cost approach.

However, technology-based IP assets pose many unique challenges to a valuation analyst. A few illustrative examples of such challenges include:

• Income approaches are often difficult to implement for a variety of reasons, including the difficulty in quantifying the portion of a product or service’s cash flows that are attributable to the subject IP asset

• Market approaches are often difficult to implement for many reasons, including the fact that IP assets are, by definition, unique. As such, comparable market transactions are often difficult or impossible to find. In addition, because IP assets are not traded on public markets and the transactions themselves are typically confidential, there are few public sources that reveal deal details that would be sufficiently comparable to be used to implement a market approach, and the data available from sources that do exist is often incomplete

• Cost approaches are often difficult to implement because the cost to create the subject assets is almost always unrelated to the value of the asset (e.g., income generation, cost savings, etc.) that can be gained from use of the asset

In addition to these challenges, perhaps the most difficult issue associated with valuing technology-based IP assets is accounting for the significant risks associated with many of these assets. Accounting for risk is particularly difficult in the very common situation when technology-based IP assets are valued prior to any (or significant) commercialization success; i.e., when the assets are “early stage.”

Lakelet Advisory Group would be most interested in assisting you with your challenging restructuring/bankruptcy or intellectual property valuations.

Case Study: The Impact of Poor Estate Planning on a Business Owner's Legacy

Background: John Smith, a 62-year-old majority shareholder in an international engineering firm, unexpectedly died without a complete estate plan. He owned 40% of the firm. John had four children, with only one involved in the business, while the other three had no official role. He was also going through a contentious divorce at the time of his death, complicating asset distribution.

Key Estate Planning Failures: John, despite his wealth, only has a basic will that overlooks crucial aspects of estate planning. Key issues include:

• No plans for business succession, leaving ownership transfer unclear.

• Lack of estate liquidity planning, which means no clear method for paying taxes or debts.

• Absence of asset protection strategies to safeguard business interests.

• No differentiation between heirs based on their involvement in the business, risking conflicts among them.

Consequences of Poor Estate Planning: Since John’s estate was in probate, his 40% share in the firm was frozen, blocking important company decisions. The lack of a clear successor led to governance problems, with disagreements among shareholders and executives on handling John’s shares. His estate faced nearly $6.7 million in estate taxes on his $16.8 million stakes, but his estate lacked enough funds to pay this. Consequently, his heirs had to sell part of his shares at a discount to cover the tax. John’s heirs, which included his wife and four children, unintentionally became major owners of the firm without a buy-sell agreement. Only one child was active in the company, while the other three lacked experience or interest, leading to disputes. The active child wanted a controlling share based on their contributions, while the others wanted to liquidate the business stake. The remaining partners of the firm were reluctant to involve any heirs in management, which created more instability.

John's divorce was not finalized at the time of his death, leaving his ex-wife with a claim to his estate, which further complicated asset distribution and delayed probate. This led to increased legal costs and financial pressure on the company. Due to these legal issues and disputes, the firm's value decreased from $42 million to $32 million in two years. This uncertainty caused client mistrust and loss of contracts, while competitors took advantage of the instability. The family had to sell their shares at a lower price to an external buyer. John's family faced emotional and financial strain, losing control of the business and seeing the value drop. The active child, who had been dedicated to the company, resigned amid conflicts. The four-year probate process delayed access to funds, forcing the family to take loans to cover living expenses.

Lessons Learned & Preventative Measures: Business succession planning suggests that a buy-sell agreement could ensure a smooth transfer of shares to existing partners. Estate tax planning recommends a trust or life insurance policy to cover tax obligations, avoiding asset sales. Liquidity planning, such as setting aside liquid assets or key-man insurance, prevents financial pressure on the business and family. Clear distribution among heirs can be achieved through a family trust, ensuring active involvement in leadership. Divorce-proofing the estate can be done with prenuptial agreements and separate property trusts to safeguard business assets.

Conclusion: John Smith’s failure to plan his estate caused legal issues, family disputes, business problems, and financial losses. His 40% share was sold for less than it was worth, resulting in lower wealth for his heirs. A proper estate and succession plan could have protected his legacy and family wealth while easing business transition. This situation highlights the necessity of estate planning for business owners, particularly those with valuable international assets and complicated family situations.