Are You Looking For a Compensation Specialist?

Perhaps, EMCO/ Hanover has the required credentials that you seek?

Try, EMCO/Hanover ( for its specialists have authored various articles on executive compensation plus given testimony as a compensation specialist before the United States Tax Court (i.e.: L&B Pipe & Supply Co., Inc., wholesale/plumbing and irrigation supplies; Lumber City, a wholesaler and retailer of building products; and Norman Wright Mechanical Equipment Corp., a representative for various manufacturers of heating and air conditioning equipment) plus Cellceutix Corporation (trading symbol: OTC:CTIX), an IRS disputed matter regarding stock received as compensation for services rendered.

Continue reading Are You Looking For a Compensation Specialist?

Are You Looking For a Wealth Management Specialist?

Perhaps, EMCO/ Hanover ( can meet your needs for in 2014, The EMCO/ Hanover Group added another dimension to provide quality service to our client base through HK Wealth Management, Inc.. (“HK”), which is a Registered Investment Adviser, located in the Westwood section of Los Angeles .  Like EMCO/ Hanover other Group Members, HK’s motto is:  THE ANSWER IS YES!  What this really translates to is a dedication to help clients achieve everything that they believe can be attainable.  While returns are never guaranteed, we believe that nothing is impossible…it just takes diligence and hard work!   Most people hear the word “NO” whenever they ask a question or have an idea.  Such negativity is ingrained in our collective psyche. Not to us!  EMCO/ Hanover has made a conscious decision to use positivity [hence the word: YES] to distinguish itself from the rest of the business community.  These simple words have become our hallmark.

Contact Bruce Barren at EMCO/Hanover Group for more information.

Discounted Cash Flow Method of Valuation Short Comings

The short comings of using the Discounted Cash Flow Method of Valuation.

This is another valuation method used to estimate the attractiveness of an investment opportunity. However, the shortcomings in the use of Discounted Cash Flow (DCF) analysis is that it uses future and often very difficult to measure free cash flow projections and discounts  for they most often using the weighted average cost of capital to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

EMCO/ Hanover’s advice is: be aware that the Discounted Cash Flow Method (DCF) does have shortcomings. DCF is merely a mechanical valuation tool, which makes it subject to the axiom “garbage in, garbage out”. Small changes in inputs can result in large changes in the value of a company. Instead of trying to project the cash flows to infinity, terminal value techniques are often used. A simple annuity is used to estimate the terminal value past 10 years, for example. Remember that it is harder to come to a realistic estimate of the cash flows as time goes on.

Because of the above,  EMCO/ Hanover (see: rarely uses this method and only when there is a definable and projectable flow in earnings as is often found in real estate and “quality” tenant occupancy. Also, understand that industries do have volatility and cycles (i.e. real estate), thus is often difficult to predict. Further the stability of historical earnings should always be taken into consideration plus changing consumer preferences along with any emerging competitive new technology in today’s world as was mistakably not done in the automobile industry. Here there were also considerable pressure exerted from the energy industry which had a material impact of the industry itself.

Company Valuation Methodologies

As we all know there are 4 basic methodologies in valuing companies. The primary ones are: Asset Value; Income Value; Market Comparisons and Industry Standards. Each is described below and are considered to be an outgrowth of Revenue Ruling 59-60. However, there is also an unwritten standard often used when all else fails which Emco/ hanover often employs.

  1.  Asset: This considers the business to be a collection of assets that have a marketable value to a third party in an asset sale. Asset valuations are typically used for businesses that are ceasing operation and for specific types of businesses such as holding companies and investment companies. Asset valuation methods include the book value method, the adjusted book value method, the economic balance sheet method, and the liquidation method.
  2. Income: Under this method valuations are based on the premise that the current value of a small business is a function of the future value that an investor can expect to receive from purchasing all or part of the business. Income valuations are the most widely used type of valuation. They are generally used for valuing small businesses that are expected to continue operating for the foreseeable future. Income valuation methods include: the capitalization of earnings method, the discounted future income method, the discounted cash flow method, the economic income method, plus other formula methods. Caution has to be exercised here because its use is highly dependent upon the continuation of the level of historical earnings and projected economic trends which as we know can often change during a company’s business cycle.
  3. Market Comparison: This is based upon current conditions amongst active business buyers, recent buy-sell transactions, and other fairly comparable business entities. Financial attributes of these comparable companies and the prices at which they have transferred can server as strong indicators of fair market value of the subject company. One of the best examples of this is the capitalization determinations of publicly-traded companies as expressed on the various publicly-traded market exchanges, like the NYSE or for smaller companies, the OTC Market (Over-the-Counter).
  4. Industry Standards: Often times a particular industry, like the distribution and separately a service business, is valued based on a multiple of its annual revenues. However, caution has to be used here for many companies are a composure of multiple industries and thus it is not unusual to find an appraiser using more than one valuation methods in determining the value of a business enterprise.

If all fails in assigning one of the above Methods, EMCO/Hanover then uses an unwritten standard, given its credentials in mergers and acquisition which is also used by investment bankers. It is 3x – 5x times pre-tax cash flow [based on certain analysis of a Company’s financial statements] but adjusted for any extraordinary or non-direct business expenses, to determine an investment’s fair value. EMCO/Hanover believes that such a standard is reasonable for non-publicly-traded, non-technology, based businesses, excluding real estate which has its own capitalization procedures.

One should also be cognizant of the alternative of establishing a “Fair Value” which is not a quoted price on any Stock Exchange which is the best evidence of fair value – quoted prices in an active market. However, if the market for a financial instrument is not active, then an entity can establish fair value by using valuation technique/ guidelines, as defined and referenced above particularly under the three other primary methods plus originally set out under Revenue Ruling 59-60 along with that presented under the AICPA’s IAS 39 Financial Instruments: Recognition and Measurement. —– A valuation technique: (a) incorporates all factors that market participants would consider in setting a price and (b) is consistent with accepted economic methodologies for pricing financial instruments.

See also separate article on: The short comings of using the Discounted Cash Flow Method of Valuation

MERCHANT BANKING – The North American Variant

Do You Know the difference between the American vs. European Definition of Merchant Banking?

Merchant banking services in North America range from the very specialized to full service. Yet, the traditional European-style is not what most of today’s North American merchant bankers are providing.


In late 17th and early 18th century Europe, the largest companies of the world were merchant adventurers. Supported by wealthy groups of people and a network of overseas trading posts, the collected large amounts of money to finance trade across parts of the world. For example, The East India Trading Company secured a Royal Warrant from England, providing the firm with official rights to lucrative trading activities in India. This company was the forerunner in developing the crown jewel of the English Empire. The English colony was started by what we would today call merchant bankers, because of the firm’s involvement in financing, negotiating, and implementing trade transactions.

The colonies of other European countries were started in the same manner. For example, the Dutch merchant adventurers were active in what is now Indonesia; the French and Portuguese acted similarly in their respective colonies. The American colonies also represent the product of merchant banking, as evidenced by the activities of the famous Hudson Bay Company. One does not typically look at these countries’ economic development as having been fueled by merchant bank adventurers. However, the colonies and their progress stem from the business of merchant banks, according to today’s accepted sense of the word.


Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained to an individual or a banking house whose primary function was to facilitate the business process between a product and the financial requirements for its development. Merchant banking services span from the earliest negotiations from a transaction to its actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity was directed towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce “collectable” profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and seller in a transaction.


During the 20th century, however, European merchant banks expanded their services. They became increasingly involved in the actual running of the business for whom the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others.

Since the 18th century, the term merchant banker has, therefore, been considerably broadened to include a composite of modern day skills. These skills include those inherent in an entrepreneur, a management advisor, a commercial and/or investment banker plus that of a transaction broker. Today a merchant banker is who has the ability to merchandise — that is, create or expand a need — and fulfill capital requirements. The modern European merchant bank, in many ways, reflects the early activities and breadth of services of the colonial trading companies.

Most companies that come to a U.S. merchant bank are looking to increase their financial stability or satisfy a particular, immediate capital need.

Professional merchant bankers must have: 1) an understanding of the product, its industry and operational management; 2) an ability to raise capital which might or might not be one’s own (originally merchant bankers supplied their own capital and thereby took an equity interest in the transaction); 3) and most importantly, effective skills in concluding a transaction – the actual sale of the product and the collection of profit. Some people might question whether or not there are many individuals or organizations who have the abilities to fulfill all three areas of expertise.


Merchant banking services in the U.S., however, have been undertaken by highly specialized “boutiques”, where each offers its own specialized service. The typically charge fee income for each service, and transactions are oriented toward short- term deals rather than long-term relationships.

Very few offer the complete range of services that are available through traditional European merchant banks. In fact, most companies that come to a U.S. merchant bank are looking primarily to increase their financial stability or satisfy a particular, immediate capital need. They are not looking for the actual “on-line” operating advice and assistance required to complete the traditional merchant banking process.


In providing financial assistance, merchant banks offer a full understanding of all facets of the capital markets. This includes all types of debt and equity financing available from both the domestic and international markets. A merchant banker, cognizant of capital costs, looks for the best sources of capital, including its restrictions and dollar limitations.

It should be understood that interest rates are not the only definition of capital costs. Restrictions on availability, prepayment terms, and operating effectiveness can often outweigh what might appear to be inexpensive capital with low interest rates. Too often, capital includes costs which force an entrepreneur or a business to undertake undesirable actions. In the short-run, some actions might be necessary, but often in the long-run are detrimental. The traditional merchant banker understands these capital limitations and can structure a transaction which is beneficial to all sides of the table — not just the capital source.

He also knows how to substitute one type of capital for another, sometimes utilizing internal sources from asset repositioning or cash creation from improvements in working capital. He understands fully the risk versus return elements necessary to complete the capital procurement process.


There are many merchant bankers operating in North America today, both large and small, though only a subset offer a full range of services. Before selecting a merchant banker, one should decide what services are required. Is it capital, general management consulting, supervision of an existing investment, a joint venture, or merger/acquisition assistance to spot and consummate a distribution, product or manufacturing opportunity that one requires?

It is paramount to know who in such an organization is best qualified to fill these needs. Also, selection of the merchant banker depends on whether one needs to satisfy a short or a long-term objective, or both.

In the final analysis, it is the personal relationship between the parties that will determine the chances of success. One may find that the smaller merchant banking companies are both comprehensive in their services and reliable. They may effectively handle all transaction elements, while remaining within one’s cost parameters. Moreover, these smaller firms can offer more personalized services, better performance and quicker responses to a client’s needs.

Locating a merchant bank that fits a particular need can be as difficult as the transaction itself. Even though there are such directories as that published by the American Bankers’ Association, the National Association of Security Dealers and the Directory of Corporate Finance, there are no sources that evaluate the abilities of North American merchant bankers. For each transaction’s needs, one must assess the skills of a merchant banker while examining the firm’s performance record.

About the author:

Bruce W. Barren has been Group Chairman of the EMCO/Hanover Group since its founding in 1971. EMCO has concluded more than $3 billion in financial transactions worldwide as international merchant bankers.

Mr. Barren has been honored in California by various municipal and county governments as well as the State Assembly and Senate for having helped turn around over 100 businesses. He has written numerous articles on corporate finance, mergers/acquisitions, and on-line management. He has also lectured to professional societies and taught courses in California’s Continuing Professional Education program.

Tips on Choosing the Right Expert Court Witness

Finding the right expert court witness can be a complicated process, regardless of whether the court matter involves real estate, business partnerships, Boards of Directors, wrongful terminations, or minority shareholder rights. There are many factors to consider. Here are some quick tips to narrow your search for a dependable court witness in these fields.

The Right Qualifications

The term “expert” is crucial. Find a court witness with a solid background in the areas needed for the case. A qualified witness will usually be able to bring clear, concise information to the case. Check the witness’ background as an expert to be sure he is qualified in the field. This will also help you discover his or her strengths and weaknesses, and to avoid major surprises at the last minute. For instance, both sides may have contacted the same court witness. Or, the expert may have already taken a view in a previous similar case, which may be unhelpful in your client’s case.

Also, ask to be sure the witness will accept instructions from both defendants and claimants. Many courts do not favor one-sided experts, and will choose one with a reputation of being even-handed.

If the other side chooses their own expert court witness, be sure your expert has similar qualifications so theirs doesn’t appear to be “more qualified” than yours.

Get Clients Involved

Allow your clients to meet the potential court witness before making a choice. Although the client will usually not be directly involved in the final decision, he or she may still want to give input.

Choosing a Court Witness for Complex Cases

With complex cases, be sure the court witness you are considering is willing to work closely with your team. Keep him informed of every development in the case, and involve him in important decisions that would benefit from his opinion. But even during a complex case, please do respect his privacy and independence.

Choosing the Same Court Witness Again

If you need to hire the same expert court witness you’ve used before, do another check on credentials. He could have even more beneficial credentials than before. Ask your colleagues or counsel if anything has changed (for better or worse) in the expert’s background.
Writing Skills

As courts move more toward the “written report” than experts actually taking the witness stand, you’ll need to be sure your expert has the correct skills to write a comprehensive report.

Bias and Conflict of Interest

Before hiring an expert court witness, be sure that he does not have a conflict of interest or any potential reasons to be biased in the case (past or present). Even if the expert is not biased, there may be things in his past that the other side could point out and weaken his influence and evidence in the eyes of the court.

Most importantly, make sure the expert has a history of being balanced in every case. The expert court witness in your case will be one of the major players, and could make the difference between winning and losing. Use the tips above to make an informed choice.

Majon’s Law and Politics Directory – Majon International, November 13, 2006 wherein they refer the reader to EMCO/Hanover’s website at:

Personal Goodwill Allocatable in M&A Transactions

Did you know that Personal Goodwill can be a Corporate Asset and can exist outside of a “C” corporation in an M&A Transaction.

Most buyers want to buy the assets, not the stock, of a closely held corporation.  This poses an extra problem for the owner of a “C” corporation since there is a tax both at the corporate level on the asset sale and a tax at the shareholder level on the liquidation of the corporation (so that the shareholder can get the sale proceeds).  In the 1998 Tax Court case of Martin Ice Cream, the shareholder tried to defeat the “double tax” by claiming to own a great deal of the goodwill, for which Haagen-Dazs paid him personally.  The IRS lost, opening a door to a planning technique.  People thought that this was a difficult planning technique, which was arguably closed by Larry E. Howard v. U.S. (D.C. Wa. 2010).  However, H&M, Inc. TC Memo 2012-290 and Bross Trucking, TC Memo 2014-107, as bolstered by an estate tax case – Estate of Franklin Adell, TC Memo 2014-155 – confirm that personal goodwill can exist outside of the “C” corporation.  As a result, planners must help their clients document this goodwill far in advance of a sale to achieve this result.

EMCO/ Hanover (website: is an expert in this field and has  been accepted by the I.R.S. and the U.S. Tax Courts as such. Refer also to:  Litigation Cases in which Bruce Barren has been qualified as an expert