Selling a Distressed Entity

When you envision selling your company, you hope it’s healthy and in the most appealing state for buyers in the market. Unfortunately, that’s not always the case. The economic adage “sell high, buy low” is not applicable when one is required to sell a distressed entity.

Generally, a distressed entity needs to rely on non-tangible assets to yield the optimal value. For example – customer list, intellectual property, management team, etc. A few things to consider when trying to sell your distressed entity:

• Be candid: do not hide the problems. Once the buyer commences the due diligence, they will find the issues and then some, so be forthright.

• Be realistic about the enterprise value: If possible, have a professional valuation performed on the business.

• Highlight your strengths: Perhaps you’re not in the most financially stable position, but your executive team may be a critical component of the team that can take your company to the next level.

• Work with a proven counsel and financial advisor: More than likely this will not be your current tax preparer of corporate counsel – you need professionals that are aware of all the nuances of these transactions.

• If the company is in distressed, do not delay in your decisions: Time is the #1 factor.

• Be prepared: Have all the financial statements, corporate information, and operational information available to the potential buyers in a professional format and structure.

• Don’t lose hope or focus: Selling a distressed entity requires a lot of time and focus. You can’t drop everything to try and sell your business otherwise it will further decline. Keep morale up and work on improving your business as much as possible during the process.

Tax Planning for Exit Strategies

There is no doubt that exit planning and its execution are complex and challenging. The exit planning is critical and can save the seller a significant amount of funds. With a fifteen-month plan to exit your business with the proper planning and execution – the seller should be able to add another 30% to his / her net proceeds. This is possible because it:

• Provides you with the time to properly “clean-up” the balance sheet;

• Eliminates unnecessary costs. Remember that each dollar you save or add will within the next 18 months generate a significant result. For example, if the company has a valuation multiple of 6, then every dollar improvement in EBITDA generates you, the owner, 6 dollars. This is not a bad ROI. The general pitfall is there are “too many sacred cows”;

• Allows the inventory to be optimized;

• Assures you have the right team. Too many low / middle market companies do not have the bench strength once the owner leaves. Or even worse, the bench strength comes from family members. Develop a team knowing the short-term and long-term strategy and share the upside opportunity with them. If done properly, these key individuals will generate their savings several fold in comparison to the costs;

• Incentivizes all the key players to ensure everyone is on the same page; and

• Gives you time to meet with your tax advisor very early in the process to ensure you minimize your tax exposures and / or obligations. Ensure that your tax advisor is an expert in the M&A phases of business. This is a very complex set of transactions – this is not the time to have an inexperienced player. After all – this business sale may be the most important financial transaction in your life.

From a tax perspective, you, the owner, should have a solution to the following tax issues:

• What Type of Entity Do You Use to Conduct Your Business?

• Is a Tax-Free Deal Possible?

• Are You Selling Assets or Stock?

• Allocation of Purchase Price is Critical.

• Other Payments to Sellers; Personal Goodwill.

• Installment Sales (Seller Financing) and Escrows.

• Earnout/Contingent Payments.

• Outstanding Stock Options.

• State and Local Tax Issues.

• Pre-Sale Estate Planning.

Reviewing Other Business Valuation Reports

Business Valuations are a subjective financial exercise. For themost part, we can all agree what classification certain assetsand/or liabilities should be accounted for and appropriatelyclassified on the balance sheet. However, with businessvaluation, the key factors are subjective. These subjective factors include:

• Selection of Valuation Method: There are various valuation methods, such as the Income Approach, Market Approach, and Asset Approach. Each of these valuation methods have numerous subsets. The choice of which method to use can be subjective and depends on the characteristics of the business and the industry context.

• Assumptions for Cash Flow Projections: The accuracy of cash flow projections is crucial for valuation, and these projections often involve assumptions about future growth rates, profit margins, and other financial factors. These assumptions can vary among valuators and can impact the final valuation outcome.

• Discount and Capitalization Rates: In the Income Approach, discount and capitalization rates are used to convert future cash flows into present value. These rates incorporate assumptions about risk and return, and their determination do involve subjective judgment.

• Selection of Comparable Companies: In the Market Approach, selecting comparable companies or transactions involves judgment. While there are guidelines, the choice of which companies to compare to the subject company can be subjective and affect the valuation result.

• Normalization Adjustments: Adjusting financial statements to reflect the economic reality of the business might require subjective decisions. For instance, adjustments for non-recurring expenses, owner-related expenses, or related-party transactions can involve judgment.

• Market Conditions: The assessment of market conditions and their impact on the business’s risk and growth prospects can be subjective. Economic trends, industry outlook, and market sentiment all require interpretation.

• Control and Marketability Discounts: Adjustments for control (if valuing a minority interest) and marketability (if the business is not readily marketable) are subjective and can vary based on professional judgment.

• Qualitative Factors: Factors such as management quality, brand reputation, and competitive advantage can influence a company’s value but are often harder to quantify and involve subjective assessment.

• Industry-Specific Factors: Certain industries have unique characteristics that require specialized knowledge and judgment to assess correctly.

• Expertise of the Valuator: The experience, expertise, and judgment of the valuator play a significant role in interpreting data, making assumptions, and applying methodologies.

• Timing: Economic conditions and market trends at the time of valuation can introduce an element of subjectivity, as predicting future developments is inherently uncertain.

One professional valuator may have a different perspective on any of the aforenoted subjective items. Moreover, the difference can generate a materially different conclusion. Accordingly, it is paramount for valuators to document their assumptions, methodologies, and rationale for subjective judgments to ensure transparency and to allow for meaningful review and critique by peers or other stakeholders. While subjectivity is present in valuation, the goal is to minimize bias and ensure that the final valuation result is well-supported and credible.

The varying perspectives of different business valuators can result in the production of very different valuations. Business valuators may review the work of other business valuators for several reasons, all of which aim to ensure the accuracy, credibility, and fairness of the valuation process. Here are some common reasons why business valuators might review the work of their peers:

• Quality Assurance: Reviewing the work of other valuators helps maintain consistent quality standards within the valuation industry. This process helps identify any errors, inconsistencies, or deviations from accepted valuation methodologies that could impact the accuracy of the valuation.

• Validation of Assumptions and Methodologies: Different valuators may use varying assumptions, methodologies, and data sources when conducting valuations. A review by another experienced valuator can help validate the assumptions and methods used, ensuring that they are reasonable, justifiable, and appropriate for the specific valuation context.

• Verification of Results: Reviewing the results of a valuation by an independent party can help verify that the conclusions drawn by the original valuator are supported by sound analysis and evidence. This is especially important in cases where significant financial decisions, such as mergers, acquisitions, or legal proceedings, are based on the valuation outcome.

• Complex or Unusual Cases: In cases involving unique or complex business situations, seeking the input of other experienced valuators can provide valuable insights and perspectives. Different experts may have varied approaches for handling intricate valuation challenges.

• Third-Party Validation: Some clients or stakeholders may request a third-party review of a valuation report to ensure an unbiased assessment of the valuation. This adds an additional layer of credibility to the valuation process.

• Litigation or Disputes: In legal cases or disputes where valuations play a crucial role, opposing parties may engage separate valuation experts. Each side’s valuator may review the other’s work to identify potential weaknesses, inconsistencies, or areas of disagreement.

• Training and Professional Development: Junior valuators or those new to the field may benefit from having their work reviewed by more experienced colleagues. This process helps build skills, improve understanding of valuation concepts, and ensure the next generation of valuators adheres to industry standards.

In summary, reviewing the work of other business valuators is a mechanism to enhance the overall quality and credibility of the valuation process. It promotes transparency, accountability, and accuracy, ultimately contributing to more informed decision-making by clients and stakeholders.

Considerations for Estate/Gift Business Valuations

Valuing an estate business can be a complex and challenging process, as it involves taking into account a wide range of factors that can impact the value of the business. Some of the key challenges associated with estate business valuations include:

• Difficulty in assessing the value of intangible assets: Estate businesses often have a significant amount of intangible assets such as goodwill, brand reputation, and customer loyalty. These assets can be difficult to quantify, and their value is often subjective.

• Variability of revenue streams: Estate businesses typically have multiple revenue streams, such as rental income, property sales, and property management fees. The variability of these revenue streams can make it challenging to forecast future cash flows, which is a critical component of business valuation.

• Complex ownership structures: Estate businesses often have complex ownership structures, with multiple shareholders or partners. This can make it challenging to determine the true value of the business, particularly if there are disagreements among the owners regarding the value of the business.

• Impact of market conditions: Estate businesses are highly sensitive to market conditions, including changes in interest rates, economic cycles, and local real estate trends. These factors can significantly impact the value of the business, and it can be challenging to predict their future impact on the business.

• Regulatory compliance: Estate businesses are subject to a range of regulations, including zoning laws, building codes, and environmental regulations. Non-compliance with these regulations can impact the value of the business, and it can be challenging to assess the potential impact of regulatory changes on the business.

Overall, valuing an estate business requires a comprehensive understanding of the industry, as well as an in-depth analysis of the various factors that can impact the value of the business. It is typically recommended to seek the assistance of a qualified and experienced business valuation professional to ensure an accurate and reliable valuation.

What Are Average Costs of Estate Business Valuation?

The average cost of an estate business valuation can vary widely depending on various factors such as the size and complexity of the estate, the type of business being valued, the purpose of the valuation, and the level of detail required in the valuation report.

In general, estate business valuations can range from a few thousand dollars to tens of thousands of dollars. Some valuation firms may charge an hourly rate for their services, while others may charge a flat fee or a percentage of the estate’s value.

It’s important to note that the cost of a valuation should be viewed in the context of the potential benefits it can provide, such as reducing the risk of IRS challenges to the estate’s valuation, ensuring compliance with estate tax laws, and helping to minimize estate taxes.

It’s recommended to obtain a few quotes from reputable valuation firms and compare their services and fees before choosing a valuation firm.

Estate & Gift IRS Valuations

It is important to ensure that a business valuation is completed accurately and in compliance with IRS guidelines. An inaccurate valuation can result in significant penalties and taxes owed by the estate. Therefore, it is recommended to consult with an experienced tax attorney or estate planning professional to ensure that the business valuation is completed correctly.

There are several challenges associated with estate gift business valuations for IRS purposes.

• Lack of Market Data: Valuing a closely held business can be challenging because there may be limited market data available for similar businesses. As a result, the valuation expert may need to rely on alternative approaches, such as the income or asset-based methods.

• Changes in Market Conditions: Market conditions can change rapidly, especially in volatile industries, which can impact the value of a business. It is important to consider the current market conditions when conducting a business valuation, especially if there are significant changes in the industry or the economy.

• Disputes Among Heirs: If there are multiple heirs involved in an estate, disagreements can arise about the value of the business. These disputes can lead to legal challenges, which can delay the estate settlement process.

• Tax Laws and Regulations: Tax laws and regulations related to estate gift business valuations can be complex and subject to change. It is essential to stay current with the latest laws and regulations to ensure compliance and accuracy in the valuation process.

• Timing: The IRS typically requires a business valuation to be completed within six months of the date of death. This can be a challenge if there are complex business structures or disputes among heirs that need to be resolved before the valuation can be completed.

• Lack of Access to Information: Sometimes, the business owner’s financial records and other key information may not be readily available, making it challenging to conduct a comprehensive valuation. In such cases, the valuation expert may need to rely on alternative sources of information or make assumptions based on available data.

What Percent Of Estate Valuations Are Not Accepted by the IRS?

The Internal Revenue Service (IRS) does not provide an official percentage of estate valuations that are not accepted. However, it is known that the IRS conducts estate tax audits to ensure that taxpayers are accurately reporting the value of their estates.

According to a report by the Treasury Inspector General for Tax Administration, the IRS examined approximately 8,600 estate tax returns in fiscal year 2019 and recommended adjustments to about 28% of them. This suggests that a significant percentage of estate valuations may not be fully accepted by the IRS.

It’s important to note that the reasons for adjustments can vary widely and may not necessarily indicate that the taxpayer intentionally underreported the value of their estate. In some cases, the adjustments may result from differences in the valuation methods used by the taxpayer and the IRS.

The Role of a Business Valuator in Product Liability

It stands to reason that product liability actions are quite complex, and establishing legal fault and economic loss often requires the assistance and testimony of experts. Aside from the legal perspective, product liability includes elements of finance, business valuations, forensics, determination of economic losses, accounting, economics, management, and other disciplines. It is the job of a valuation expert to measure economic loss. Doing so requires a thorough examination, including a careful analysis of pertinent operational, financial, industrial, and economic data. A valuation expert’s responsibility is to measure the value by which all parties are made “whole” after the event.

Not all valuation professionals are created equal. Every economic loss profile is unique and therefore requires an experienced and knowledgeable professional to give an independent, well-reasoned, and well-supported opinion.

At Lakelet Advisory Group (LAG), our experts are highly experienced and credentialed. We offer both valuation and forensic accounting services, enabling us to ensure we have the best information available and can deliver the most accurate measure of economic loss based on that information. Our team has the ability to examine large amounts of complicated data in an efficient and cost-effective manner, and report solid conclusions supported by careful analyses.

Merchant Cash Advances: Legal Landscape, Bankruptcy Recovery, and Litigation Support

A fintech platform reported default rates of 8.5% to 10.5% among MCA borrowers. This gives us a rough idea of accounts that go into default. As a benchmark, traditional business loan delinquency stands much lower—at 1.16%.

A small to mid-size entity in bankruptcy averages ~3 MCAs per filing.

Lakelet Advisory Group’s Service for MCAs.

Lakelet Advisory Group helps MCA providers protect and maximize recovery in distressed situations. We analyze contracts for recharacterization risks, usury exposure, and UCC perfection to strengthen legal standing. Our forensic team traces receivable flows, identifies preference or fraudulent transfers, and models expected recovery under Chapter 7 or Chapter 11. In litigation, we support counsel with expert testimony, financial exhibits, and loss quantification, while also developing workout strategies that preserve cash flow outside of bankruptcy.

Beyond individual cases, we conduct portfolio risk reviews, highlight exposure to stacking and industry concentrations, and provide regulatory insights shaping MCA enforceability. With deep experience in valuation, bankruptcy, and financial forensics, Lakelet Advisory Group delivers clarity, defensibility, and actionable strategies—helping MCA providers improve collectibility and mitigate risk.

Legal Characterization and Direction of MCAs

The legal treatment of MCAs in bankruptcy depends on whether the transaction is deemed a “true sale” of receivables or a disguised loan. Courts examine the substance over form, with key factors including:

· Whether repayment is contingent on actual receivables

· The presence of a fixed repayment schedule

· Recourse against the merchant if sales decline

· The use of personal guarantees and confessions of judgment (COJs)

If classified as a true sale and secured with a perfected UCC filing, the MCA provider may recover directly from receivables and avoid inclusion in the bankruptcy estate under §541 of the Bankruptcy Code. However, in most cases, courts have found MCA agreements to be loans, rendering them unsecured claims subject to the automatic stay under §362 and substantially reducing recovery prospects. Additionally, aggressive pre-petition collections can be clawed back as preferences (§547) or fraudulent transfers (§548).

Market Trends, Regulatory Actions, and Case Outcomes

• Market Scale & Growth: Published market-size estimates diverge, but all show rapid growth. Allied Market Research pegs 2023 global MCA volume at $17.9B with a forecast to $32.7B by 2032 (CAGR ~7.2%).[1] Some trackers report even steeper trajectories, but methodologies vary.[2]

• Bankruptcy courts are increasingly scrutinizing “true sale” claims. Recent S.D.N.Y. rulings (e.g., In re J.P.R. Mechanical, Inc.) recharacterized MCA agreements as loans and allowed the clawback of >$3M in pre-petition payments, despite “sale of receivables” labels, highlighting preference exposure when reconciliation is weak or term/recourse looks loan-like.[3]

• Small-business demand context. Federal Reserve Small Business Credit Survey shows firms’ applications for loans/LOCs/MCAs dipped from 40% to 37% (2022→2023), with approval rates largely unchanged owners continue turning to non-bank options when banks tighten.[4]

• There is no widely published data on the average number of MCAs per bankruptcy, but “most small business debtors under Subchapter V of Chapter 11 have at least one merchant cash advance creditor.”[5] For businesses filing for Chapter 11 to have more MCA obligations stacked on top of each other, especially when financing, has become a repeated, urgent solution.

MCA Recovery Outcomes by Bankruptcy Chapter and Legal Classification

In distressed scenarios or bankruptcy, MCA providers often experience sharply negative returns. For example, on a $100,000 advance with a contractual repayment of $135,000, a 10% recovery over 12 months equates to a -90% ROI. Breakeven occurs only with full recovery of the advanced amount, not including profit. Typical distressed recoveries for recharacterized MCAs are under 20%, especially in Chapter 7 liquidations.

Why This Matters to Recovery Outcomes

If an MCA is recharacterized as a loan in bankruptcy, the claim is typically unsecured, subject to the automatic stay, and prior collections can be avoided as preferences or fraudulent transfers, slashing recoveries vs. “true sale” treatment with perfected security interests. Enforcement actions and COJ limits increase the odds that aggressive pre-petition debits are challenged and clawed back, or that contractual terms are voided, directly affecting net ROI.[6]

Adding Value by Consolidating Services

If your firm can consolidate services and address MCAs strategically, you can offer distinct advantages:

1. Cost Reduction

· Simplify servicing: Consolidating MCAs into a single structured arrangement (e.g., a term loan or manageable repayment plan) can lower administrative overhead and eliminate the high factor fees—typically 1.1× to 1.5× the advance.[7]

· Reduce expensive stacking: Prevent businesses from entering repeated MCA cycles that dramatically increase costs via repetitive high repayments.[8]

2. Risk Mitigation

· Improved cash flow predictability: Replacing daily or weekly holdbacks with structured repayments reduces volatility and helps clients budget more effectively.[9]

· Avoid legal pitfalls: MCAs often come with aggressive terms like ACH withdrawals, personal guarantees, and UCC filings. Consolidation into more standard, transparent terms lowers exposure to defaults and potential litigation.[10]

3. Enhanced Negotiating Leverage

· In bankruptcy contexts, you can use tools like automatic stay, prioritizing claims, or negotiating secured vs unsecured status to streamline resolution. Consolidation supports such strategic maneuvering.[11]

· Professional representation: Your integrated services (valuation, restructuring, negotiation) give the client a stronger, more credible position with MCA funders and the court.

Lakelet Advisory Group: Litigation Support That Moves the Needle

Lakelet Advisory Group helps determine what’s collectible, what’s avoidable, and what’s negotiable in MCA disputes. Here’s how we add value (and why it benefits your case):

• Deal Characterization & UCC Perfection Review: We test MCA terms against the three core factors courts scrutinize (contingency on receivables, fixed terms, and recourse) and verify perfection gaps to argue secured “true sale” when supportable or to pressure concessions when it isn’t. This can shift a claim from unsecured to secured (or vice versa), materially changing expected recoveries.

• Preference/Fraudulent-Transfer Analytics: We reconstruct payment flows and timing to quantify §547/§548 exposure; critical when rulings like J.P.R. Mechanical show millions can be clawed back. Quantifying that exposure tightens settlement ranges and informs plan negotiations.[12]

• Forensic Receivables Tracing: We map pre- and post-petition receivable streams, identify carve-outs, and surface third-party payment processors or lockbox gaps, creating actionable leads for turnover demands or adequate-protection negotiations.

• Expert Support & Testimony: We translate industry mechanics (reconciliation practices, factor rates vs. APR optics, COJ usage) for the court, aligning with evolving case law to strengthen usury defenses (when appropriate) or to support recharacterization arguments.[13]

• Plan & Workout Modeling: We build scenario models (sale vs. loan characterization; secured vs. unsecured; preference outcomes) to set settlement anchors and accelerate resolution, improving time-to-cash vs. protracted litigation.

The MCA industry remains a fast-growing alternative finance sector, but legal recharacterization risks in bankruptcy substantially impact recoveries. At Lakelet Advisory Group, we provide effective litigation support and proactive restructuring to ensure true sale status and perfected security interests. We have a proven track record of materially improving collection prospects.

[1] Allied Market Research. Merchant Cash Advance Market. https://www.alliedmarketresearch.com/merchant-cash-advance-market-A323338

[2] Global Growth Insights. Merchant Cash Advance Market Report. https://www.globalgrowthinsights.com/market-reports/merchant-cash-advance-market-102198

[3] Eversheds Sutherland. Preference Pitfalls for Merchant Cash Advances: Lessons from the Southern District of New York. https://www.eversheds-sutherland.com/en/global/insights/preference-pitfalls-for-merchant-cash-advances-lessons-from-the-southern-district-of-new-york

[4] Federal Reserve Banks. (2024). 2024 Report on Employer Firms: Findings from the 2023 Small Business Credit Survey. https://doi.org/10.55350/sbcs-20240307

[5] McConville Considine Cooman & Morin, P.C. The Dangers of a Merchant Cash Advance. https://www.mccmlaw.com/news-and-articles/articles/the-dangers-of-a-merchant-cash-advance

[6] Federal Trade Commission. Court Enters $203 Million Judgment in FTC Case Against Merchant Cash Advance Operator Jonathan Braun. https://www.ftc.gov/news-events/news/press-releases/2024/02/court-enters-203-million-judgment-ftc-case-against-merchant-cash-advance-operator-jonathan-braun

[7] Attorney-NewYork.com. Can You File Bankruptcy on a Merchant Cash Advance?. https://attorney-newyork.com/mca-debt/merchant-cash-advance-can-you-file-bankruptcy

[8] New Frontier Funding. How to Get Out of MCA Loans: A Comprehensive Guide. https://newfrontierfunding.com/how-to-get-out-of-mca-loans

[9] Rho Editorial Team. What is an MCA? Merchant Cash Advances for Startups. Rho (May 27, 2025). https://www.rho.co/blog/merchant-cash-advances-mca

[10] United States Bankruptcy Court, Northern District of Florida. Merchant Cash Advance Claims in Bankruptcy (by Caitlyn Coates & Michael Markham), April 2025. https://www.flnb.uscourts.gov/sites/flnb/files/2025-04_NSL_Guest_MerchantCashAdvance.pdf

[11] Coates, Caitlyn & Markham, Michael. Merchant Cash Advance Claims in Bankruptcy. United States Bankruptcy Court, Northern District of Florida (April 2025). https://www.flnb.uscourts.gov/sites/flnb/files/2025-04_NSL_Guest_MerchantCashAdvance.pdf

[12] Allied Market Research. Merchant Cash Advance Market. https://www.alliedmarketresearch.com/merchant-cash-advance-market-A323338

[13] New York Courts. Principis Capital, LLC v. I Do, Inc. 160 A.D.3d 501 (2018). https://www.nycourts.gov/REPORTER/3dseries/2018/2018_01645.htm

Be Leary of Using Industry Multiples in Isolation

The application of a simple valuation multiple, in isolation, does not constitute a reliable or professionally acceptable basis for determining value. While valuation multiples are frequently referenced in transactional discussions, they represent observed market pricing outcomes rather than valuation methodologies. Absent a recognized valuation framework, the use of a multiple does not explain the economic basis for value and therefore lacks analytical rigor.

From a valuation standpoint, multiples implicitly embed assumptions regarding expected growth, risk, profitability, and capital requirements. When a multiple is applied mechanically, those assumptions remain unidentified, untested, and unreconciled with the subject company’s specific operating and financial characteristics. As a result, the analysis lacks transparency and cannot be independently evaluated or subjected to professional scrutiny.

Moreover, the use of a simple multiple fails to adequately account for company-specific risk and performance differentials. Businesses with similar reported earnings may exhibit materially different growth prospects, customer concentration, operating leverage, or exposure to industry and macroeconomic risk. A single multiple is incapable of isolating or adjusting for these factors, notwithstanding their direct impact on expected cash flows and investor return requirements.

Equally significant is the failure of a simple multiple to consider the company’s balance sheet and capital structure. A valuation conclusion must reflect the economic interests of capital providers, which necessarily requires an assessment of interest-bearing debt, off-balance-sheet obligations, excess or deficient working capital, and non-operating assets and liabilities. Differences in these balance sheet components can materially affect equity value even where enterprise-level earnings metrics appear comparable. In addition, intellectual property—whether internally developed or acquired—may represent a significant driver of economic value that is not captured through a simplistic earnings-based multiple.

The reliance on a single multiple is also highly sensitive to the normalization of earnings. Modest changes to EBITDA or earnings arising from adjustments for non-recurring items, owner compensation, or accounting classifications can result in disproportionate changes in the indicated value. This sensitivity increases estimation risk while providing no analytical mechanism to assess the reasonableness of the resulting conclusion.

For these reasons, a valuation derived solely from the application of a simple multiple is generally not defensible in financial reporting, tax, or litigation contexts. Professional valuation standards require the application of recognized valuation approaches supported by explicit assumptions, company-specific analysis, and reconciliation to the subject company’s financial condition. While multiples may serve as secondary reference points or reasonableness checks, they do not substitute for a comprehensive valuation analysis that incorporates both earnings capacity and balance sheet considerations.

Accordingly, a simple multiple may reflect how certain market participants have priced comparable assets under particular circumstances, but without a rigorous examination of cash flows, risk, and balance sheet factors—including debt, management’s expertise, working capital, and intellectual property—it does not provide a reliable measure of value.

The Benefits of Working with An Independent Sponsor

It has become increasingly difficult for the traditional private equity method of raising funds. More investment professionals have become eager to complete deals on a deal-by-deal basis as independent sponsors. Why?

Many professionals have parted from their firms to an independent sponsor role. These extremely experienced individuals are more likely to be industry-focused, and they do not have a large portfolio under their arms, which means more time to work directly with management to improve operations. The independent sponsor will have value-added knowledge of how to grow the company versus the traditional private equity method of just bringing in and closing the deal.

Some independent sponsors, like Lakelet Advisory Group, are focused on providing high-level strategic and operational expertise to improve the operating results of the acquired company. The real value comes from what the independent sponsor does after buying the company, which is likely above the efforts of a private equity group. Lakelet Advisory Group’s advice to seller: look and evaluate what is being brought to the table.

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.”