When Do You Need One & Where Do You Get One? (Series: Valuation Fights in Litigation: Battle of the Experts)

1. Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2

2. The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. DISCLAIMER 3

3. MEET THE FACULTY MODERATOR: Kathryn Nadro Sugar Felsenthal Grais & Helsinger PANELISTS: Richard Claywell Office of J. Richard Claywell, CPA Michael Fussman Baker Tilly Garth M. Tebay Value Defined LLC 4

4. ABOUT THIS WEBINAR A dispute regarding the value of a business or business interest, other asset, or liability can often lead to litigation. When do you need a valuation expert? An independent, third-party expert is not necessarily required during the negotiation process although it may be helpful. Once you head to litigation, an expert is all but required. Are there credentials that are useful in identifying the appropriate expert? Are all credentialed experts the same or are there advantages to one over another? The process of selecting the right expert begins with identifying the issues in dispute. This webinar will help you by identifying and explaining key factors that you should consider in selecting an expert for your litigation circumstances. This webinar is delivered in Plain English, understandable to you even if you do not have a background in the subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it. 5

5. This series of webinars teaches how commercial litigators use valuation experts in commercial disputes. Valuation is used by market participants to determine the price they are willing to pay or receive to transact a sale of a security, a business, or an any other asset. The same techniques are used to determine the price a party us willing to pay or receive to settle a claim or satisfy a liability. It should be no surprise then that when there is a dispute between two or more parties regarding value, the same valuation techniques and skills are necessary to resolve the dispute. Attorneys, accountants and business owners often rely on independent, third-party valuation experts to assist in the resolution of disputes or potential conflict situations. Some of the typical situations in which valuation experts are utilized include fair value financial reporting (GAAP accounting), bankruptcy, income tax reporting, property tax appeals, estate and gift tax planning and reporting, dissenting shareholder disputes, corporate transactions and disputes, divorce litigation, shareholder disputes or economic damages analysis as well as many other business and legal purposes. As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business owners, and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 6

6. Dates shown are premiere dates; all episodes will be available on demand after their premiere date. EPISODES IN THIS SERIES Episode #1 When Do You Need One & Where Do You Get One? 1/31/19 Episode #2 The Basics 2/28/19 Episode #3 Valuing Lost Profits for Litigation Purposes 3/28/19 7

9. WHO REQUESTS A VALUATION? • Who will be the user(s) of the valuation? • Third parties (sometimes reliance, sometimes not) oCourt, attorneys (investigations, disputes, contractual requirements) oInvestors (disputes, buy-sell agreements, related party transactions) oBanks (collateral, other financing, solvency) oTrustees – ESOPS, bankruptcy, other (related party, transactions, 3rd- party transactions) oGovernment (tax, DOJ, or other regulatory) oCompanies, auditors, and their advisors (tax accountants, tax attorneys, bankers) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 10

10. WHO REQUESTS A VALUATION? (cont’d) • Is perception of independence/disinterestedness required? oConflicts of Interest oPrior experience with subject asset © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 11

14. NATURE OF THE ASSIGNMENT (cont’d) • Class of Asset/Liability oBusiness enterprise or intangible asset oReal estate oPersonal property oFinancial instruments and liabilities © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 15

15. NATURE OF THE ASSIGNMENT (cont’d) • Other issues oSpecific industry expertise/experience oLegal/tax jurisdiction (venue and choice of law) oLegal case (e.g. property damage/ marital dissolution, business interruption, intellectual property infringement, etc.) oProperty type: residential, commercial, manufacturing, agricultural, etc. oMarket locale oValuation methods © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 16

16. ECONOMIC DAMAGES • Lost profits are one type of economic damages • Entire business value is another although there are similarities and they can overlap © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 17

17. EXPERT TESTIMONY CONSIDERATIONS • Must the expert be qualified by the court? • What standards must the expert follow or meet? • What kind of work product and methodology is expected of the expert? • What methodology will the expert use? • What care/precautions should the lawyer take when preparing and working with the expert? © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 18

18. EXPERT TESTIMONY • Frye: demonstrate expertise and apply methods/theories that are generally accepted • Federal Rule of Evidence 702: a qualified expert may testify if the testimony is relevant and rests on reliable foundation. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 19

19. EXPERT TESTIMONY (cont’d) • The Daubert Trilogy oDaubert v. Merrell Dow Pharmaceuticals – FRE 702 superseded Frye and concluded that methods do not have to be generally accepted as long as testimony is relevant and reliable. oGeneral Electric v. Joiner – reaffirmed judge as gatekeeper of admissible testimony and emphasized need for detailed expert report as foundation of reliability. oKumho Tire Co. v. Carmichael – broadened application of FRE 702 to more than scientists and granted more freedom to judge with respect to considering the four factors of Daubert. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 20

20. DAUBERT CHALLENGE • Four Factors of Daubert oTheory or technique can be or has been tested. oTheory or technique has been subjected to peer review. oPotential error rate is determinable, or standards exist for error rate that is acceptable, and oTheory or technique enjoys widespread acceptance in the profession. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 21

21. PREPARATION FOR A DAUBERT CHALLENGE • Know and apply the standards • Know the relevant professional literature • Know the professional organizations • Use generally accepted methods • Consider multiple analytical methods • Synthesize your conclusion • Support your position • Disclose all analytical assumptions and variables • Subject the analysis to peer review • Test the analysis and conclusion for reasonableness © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 22

22. ACCREDITING ORGANIZATIONS • All disciplines oAmerican Society of Appraisers (ASA) oRoyal Institute of Chartered Surveyors • Business and Intangible Valuation oAmerican Institute of CPAs oCFA Institute – Chartered Financial Analyst (CFA) oInstitute of Business Appraisers oNational Association of Certified Valuation Analysts (CVA) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 23

23. ACCREDITING ORGANIZATIONS (cont’d) • Real Estate oAppraisal Institute oNational Association of Master Appraisers oNational Association of Auctioneers oCertified Appraisers Guild of America • Machinery and Equipment, Personal Property, Other Specialty oNational Association of Master Appraisers oNational Association of Auctioneers oCertified Appraisers Guild of America © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 24

24. FINANCIAL REPORTING • The Mandatory Performance Framework & Certified in Entity and Intangibles Valuation (CEIV) oAmerican Society of Appraisers oAmerican Institute of CPAs oRoyal Institute of Chartered Surveyors © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 25

25. FINANCIAL REPORTING (cont’d) • Introduced in 2017, the CEIV is a new credential intended to assist preparers of financial statements in choosing an expert to assist with the fair value measurements necessary for financial reporting purposes oPost-acquisition opening balance sheet oAsset impairment testing oMark-to-market of certain assets oFresh start balance sheet upon emergence from bankruptcy © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 26

26. PROFESSIONAL STANDARDS • Uniform Standards of Professional Appraisal Practice (USPAP) • American Society of Appraisers – standards by discipline • American Institute of Certified Public Accountants SSVS No. 1 • National Association of Certified Valuation Analysts • Regulatory Rules & Regulations – U.S. Dept. of Labor, ERISA, IRS & US Treasury, CMS (now known as BCRC), Stark Laws • Statutory and Jurisdictional Requirements – Delaware Law and other states; Divorce © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 27

27. PROFESSIONAL STANDARDS (cont’d) • Federal Rule 26(a)(2)(B) • Income Tax Reporting – IRS Revenue Ruling 59-60; State & Local Tax Regulations; Non-U.S. Jurisdictions • Financial Reporting – FASB ASC 820; Fair Value Measurements; Mandatory Performance Framework • Contractual Standards • Others? • Private Equity Group (PEG) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 28

28. BUSINESS VS. ASSET VALUATIONS • Both business and asset valuations use the same approaches – an interest in a business is an asset to the equity holder or note/bond holder oBut they often require different methods. • Asset valuation entails a single homogenous class of asset (single asset or small group of similar assets) versus an assemblage of possibly diverse assets that comprise a business enterprise or going concern. • Assessing a different benefit stream – enterprise cash flows (earnings) vs. asset cash flows (earnings). © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 29

29. BUSINESS VS. ASSET VALUATIONS (cont’d) • Business valuation typically assumes the business will continue as a going concern (i.e. indefinite life), whereas most assets have a finite life or diminishing economic returns. • The assessment and quantification of risk varies significantly. A business enterprise is a portfolio of assets with varying degrees of financial risk and often the weighted average of the risk inherent in the assets is considered a reasonable equivalent of the risk in the business enterprise. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 30

30. BUSINESS VS. ASSET VALUATIONS (cont’d) • Asset characteristics that are inherently unique, such as legally protected intellectual property, typically make application of market approaches more difficult. • Certain discounts and premia are often applied in certain methods for business valuations and would be much less frequently used in asset valuations. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 31

31. TYPE/CLASS OF ASSET/LIABILITY • Business Valuation oInvested Capital or Business Enterprise oClass of Equity or Ownership – common, preferred, LP, GP, options, warrants oL-T Debt – notes, bonds, convertible debt © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 32

32. TYPE/CLASS OF ASSET/LIABILITY (cont’d) • Real Estate & Related Assets oLand oBuildings and site improvements oFavorable/unfavorable leasehold interests (NOTE: new accounting standard will require recording of asset and liability for all leases) oEasements and rights-of-way oDevelopment rights © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 33

33. TYPE/CLASS OF ASSET/LIABILITY (cont’d) • Personal Property & Related Assets oMachinery, equipment, furniture, fixtures, etc. oVehicles, aircraft, marine vessels oGems, jewelry, art, collectibles, etc. oLeasehold improvements © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 34

34. TYPE/CLASS OF ASSET/LIABILITY (cont’d) • Other Assets & Liabilities oIn-process research and development projects oFinancial instruments – derivatives, swaps, unconsolidated investments in affiliated entities, non-marketable securities oNotes and accounts receivable oInventory oDeferred revenue liability oContingent liability – “earn outs” liability, litigation liabilities © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 35

35. TYPE/CLASS OF ASSET/LIABILITY (cont’d) • Intangible assets oTechnology-based (including intellectual property) – patents, customized software, databases, trade secrets oMarketing – related (including intellectual property) – tradename, trademarks, copyrights, domain names, service marks, trade dress, newspaper mastheads, non-competition agreements oContract-based – licenses, permits, favorable supply contracts, leases, mineral rights oCustomer-related – customer lists, customer contracts, customer relationships, order backlog oArtistic-related – literary works, musical works, photographs, films, videos, plays, operas, ballets © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 36

36. TYPE/CLASS OF ASSET/LIABILITY (cont’d) • Goodwill oEnterprise goodwill oPersonal goodwill oAssembled workforce (for US GAAP subsumed into goodwill). For U.S. income tax, it is a Section 197 intangible asset) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 37

37. WHAT IS AN INTANGIBLE ASSET? • Intangible assets – nonphysical assets such as franchises, trademarks, patents, copyrights, personal goodwill, enterprise goodwill, equities, mineral rights, securities, and contracts (as distinguished from physical assets) that grants rights and privileges and have value for the owner. oSource: International Glossary of Business Valuation Terms as agreed to by the American Institute of Certified Public Accountants, American Society of Appraisers, Canadian Institute of Chartered Business Valuators, National Association of Certified Valuation Analysts, and The Institute of Business Appraisers © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 38

39. TYPES OF INTANGIBLE ASSETS • Intellectual Assets (unregistered but codified) oDrawings oSoftware oBlueprints oDocuments oDatabases oFormulas oRecipes © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 40

40. TYPES OF INTANGIBLE ASSETS (cont’d) • Intellectual capital (uncodified human and organizational) oCollective corporate knowledge oIndividual employee skills and knowledge oKnow How oOrganizational culture oCustomer satisfaction © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 41

41. VALUATION PROCESS • The purpose of the valuation determines the standard of value. • The highest and best use of the assets of the business as a group must be assessed: oCurrent use as a going-concern. oAlternative use, assets separate and independent of one another. • The highest and best use and the purpose of the valuation determines the premise of value: oFair value (financial reporting): value in-use or value in-exchange oFair market value: going-concern or liquidation (orderly or forced) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 42

42. VALUATION PROCESS (cont’d) • Based on the premise, the appraiser must consider all three valuation approaches and choose the most appropriate. • The best methods are determined based on the approaches that are most appropriate, the availability of the data, and the purpose of the valuation. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 43

43. VALUATION APPROACHES • Income Approach oCapitalization of Earnings oDiscounted Cash Flow • Market Approach oSales Comparison oGuideline Company Transactions oGuideline Public Companies • Cost Approach oAdjusted Balance Sheet oLiquidation 1. Forced 2. Orderly © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 44

44. STANDARDS OF VALUE • The purpose of the valuation determines the standard of value oMarket value – real estate financing oFair market value – tax compliance, some litigation and disputes, regulatory oFair value – GAAP financial reporting oStatutory Fair Value – some litigation and disputes oInvestment Value – investment advice, decision making oIntrinsic Value o“Fairness” from a financial point of view o“Solvency” considering a “fair valuation” of the company’s assets © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 45

45. HIGHEST AND BEST USE • The highest and best use is the reasonably probable and legal use of an asset that is physically possible, appropriately supported, financially feasible, and results in the highest value: oIf the expected future benefits are maximized through the continued operation of the group of assets in the business in which they are currently engaged, the appropriate premise is value in-use as a going- concern. oIf the expected future benefits are maximized through the piecemeal sale of the underlying assets independent of one another, the appropriate premise is value in-exchange or liquidation. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 46

46. PREMISE OF VALUE • Going-Concern oValue of the assemblage of all the production inputs as an operating, functioning business. oIt includes all of the assets, tangible and intangible as well as goodwill as embodied in a good reputation, trained workforce, established and successful procedures, tested systems, and necessary licenses and permits. oIn a healthy, profitable company, this value is typically more than the sum of the liquidation values of the firm’s assets. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 47

47. PREMISE OF VALUE (cont’d) • Liquidation oTwo premises: 1. Orderly 2. Forced (Auction Value) oThe cumulative value of the firm’s assets net of its liabilities considering the proceeds from the sale of the assets as if sold piecemeal and independently of one another, not as a group. oIn some circumstances, the liquidation value of the business is determined net of certain closing costs such as severance pay, remediation costs, etc. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 48

48. COMMONLY ACCEPTED LOST PROFITS METHODS • Market Share Approach • Before-and-After Approach • Yardstick Approach • Sales Projection Approach © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 49

49. AVOIDANCE/INSOLVENCY VALUATIONS • Balance Sheet Test oA company is insolvent if its debts exceed its assets on a fair value basis • Adequate Capital Test oA company is engaged in (or is about to engage in) a business or a transaction for which it has reasonably small capital • Cash Flow Test oA company is incurring debts that would be beyond its ability to pay as such debts mature. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 50

50. ABOUT THE FACULTY KATHRYN NADRO knadro@sfgh.com Kathryn Nadro is an associate with Sugar Felsenthal Grais & Helsinger where she works with the Labor & Employment and Commercial Litigation practice groups. Kathryn's practice focuses on representing companies and individuals in commercial litigation as well as employment and labor matters. Kathryn has broad experience defending companies in contract, fiduciary duty and trademark litigation in state and federal court. Her successful representations include favorable resolutions for her clients in both pre-trial proceedings and at trial. Additionally, Kathryn counsels clients on employment and labor issues, including discrimination claims, executive compensation disputes and worker's compensation claims. © 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 51

51. ABOUT THE FACULTY Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan. Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce. 52© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ RICHARD CLAYWELL richard@biz-valuation.com

52. MICHAEL FUSSMAN Michael.Fussman@bakertilly.com Michael is a director in Baker Tilly’s Forensic, Litigation & Valuation Services group and has more than 15 years of experience involving valuations, mergers and acquisitions, real estate accounting, company analysis, securities fraud, contract disputes, intellectual property, business fraud, and licensing transactions. Michael has experience from both the litigation and principal investor perspective. He was also one of the founding members of the Internet start-up, Salon 123, Inc. © 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 53

53. GARTH M. TEBAY gtebay@valuedefined.com Mr. Tebay is a practicing Certified Public Accountant, Certified Valuation Analyst, and Certified in Mergers & Acquisitions with over 33 years of experience. He is the founder and Managing Partner of Value Defined, LLC, a business valuation and litigation support firm in Maumee, Ohio. He is also the Managing Partner of Tebay Mosley Associates, LLC, full service accounting, tax, and consulting firm in Maumee, Ohio as well as Managing Director of Source Companies Great Lakes Region, LLC (an affiliate of Source Companies, LLC in Pennsylvania) which provides value growth consulting and investment banking services to owners of medium-sized businesses. © 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 54

54. The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. IMPORTANT NOTES 55© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™

55. If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar on demand, please don’t hesitate to email us at: info@financialpoise.com Please include the name of the webinar in your email, and we will provide a response to your question. QUESTIONS OR COMMENTS? 56© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™

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57. About Financial Poise™ www.financialpoise.com DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. 58

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