Will the future of BV be in good hands?

The answer is a definite “yes,” and the key factor will be the willingness of the new generation of practitioners to give back to the profession. The future of the valuation profession depends on contributions practitioners make to the advancement of the profession, says a panel of seasoned experts on a BVR webinar. Giving back includes volunteering on committees at their respective organizations, contributing articles, writing books, and conducting conference sessions and webinars.

Get involved:The panel noted that, whether it be the ASA, AICPA, NACVA, or whatever organization you belong to, there are opportunities to contribute. All of the organizations have made efforts to attract young talent to serve on committees and contribute to education and marketing activities. Another way of fostering future leaders is through writing and speaking opportunities. For example, the panel noted that the upcoming new edition of Shannon Pratt’s classic text Valuing a Business will have seasoned experts and young rising stars co-writing chapters.

The panel, moderated by Jay E. Fishman (Financial Research Associates), consisted of Michelle F. Gallagher (Adamy Valuation), Ken Pia (Marcum), and Jeffrey S. Tarbell (Houlihan Lokey). The webinar was the first in a new series of “power panel” programs that bring together highly experienced thought leaders in the profession to address current issues via questions from the audience. The next episode will be on April 6—click here for details.

Tax Court allows for ‘slight’ discount for lack of control for majority interests in real estate holding companies

In a gift and estate tax dispute, the estate and Internal Revenue Service agreed to apply discounts for lack of control and marketability to the majority interests in a number of real estate holding companies. The U.S. Tax Court noted that, in prior decisions, the court found no discount for lack of control applied. However, given the parties’ agreement, here the court said it would apply a “slight” or “low” discount.

Considerable power over LLCs: During her lifetime, the decedent gave fractional interests in a number of limited liability companies to family members. A family trust of which the decedent was the trustee held the majority interest in the LLCs. The LLCs held ground leases in various California properties. During her lifetime, the decedent also served as manager of the companies. Under the LLCs’ operating agreements, the majority interest holder had considerable powers, including the right, “in conjunction with the manager,” to elect to dissolve the companies.

The IRS found gift tax and estate tax deficiencies. For both the gift and estate tax calculations, the IRS determined a higher fair market value of the LLCs based on the valuations of the ground leases. In terms of the estate tax, experts for the estate valued the majority interests by applying discounts for lack of control and lack of marketability. For its part, the IRS argued a lower discount for lack of control and marketability than the estate had used were appropriate. The estate petitioned the Tax Court for review.

Both parties retained experts to analyze the appropriate discounts for each LLC. Both parties used the adjusted net asset value approach to value the LLCs, but the experts had different approaches to calculating the discounts.

Regarding the discount for lack of control, the estate’s expert used the Mergerstat Control Premium Study, which measures control premiums on transactions of publicly traded companies. The expert compared premiums paid to acquire 50.1% to 89.9% controlling interests with those paid to acquire 90% to 100% interests. He explained that the difference in premiums between the two blocks suggested a discount for controlling interests that lacked total control. He then considered factors specific to the LLCs, including the possibility of costly litigation should the majority interest holder attempt to liquidate and dissolve the companies.

In contrast, the IRS’ expert used closed-end funds classified as real estate funds to calculate the discount for lack of control. The data indicated a range of 3.5% to 15.7%, with a median discount rate of 11.9%. Comparing the funds to the subject interests, he found that closed-end funds were “minority interests and completely devoid of any control.” Therefore, a discount for lack of control for the subject interests should be at the “bottom of the range” of the closed-end discount rates. He arrived at a 2% rate.

The court noted the LLCs’ operating agreements gave significant power to the majority interest holder and the family trust held a majority interest in every LLC. Therefore, the discount for lack of control “should be low.” The court noted that it had accepted valuations of discounts based on closed-end funds for purposes of determining minority-interest discounts, not discounts for lack of control for a majority interest. Further, the closed-end funds the IRS’ expert used were too dissimilar to the subject LLCs. Therefore, the court rejected the 2% discount rate.

The court also “hesitate[d] to adopt” the estate expert’s range (5% to 8%), finding he proposed a higher rate based on the risk of potential litigation when there was no evidence in the record that minority interest holders would sue in case of dissolution. The court found a 4% discount for lack of control was appropriate.

This case also includes a discussion of the discount for lack of marketability and a charitable contribution discount. In general, the Tax Court found the estate’s experts, in valuing the various properties, presented a more reliable discount analysis.

A digest of Estate of Warne v. Commissioner, T.C. Memo 2021-17 (Feb. 18, 2021), and the court’s opinion will be available soon at BVLaw.

SPAC transactions included in 2021 Mergerstat Review

The special purpose acquisition company (SPAC) flourished during 2020, and SPAC transactions are included in the 2021 edition of the Mergerstat Review. A SPAC is a shell company that raises capital in an IPO and then acquires an operating company to form a new merged entity. The Mergerstat Review features tables to highlight aggregate deal volumes and deal values for your analysis. Also, the FAQ page has been updated for the new edition. The 2021 edition will be available in mid-April in PDF format and early May for the print edition.

Mergerstat Reviewis an annual publication (with monthly updates) that presents compiled statistics relating to U.S. and cross-border mergers and acquisitions that involve both publicly traded and privately held companies. Data on M&A announcements and purchase prices are presented annually and quarterly, for the current period and historically, including details on individual deals and trends in prices, methods of payment, multiples, and premiums.

Updated DealStats Companion Guide now available

The DealStats public- and private-transaction database has a newly revised Companion Guide that reflects updated charts, graphs, and exhibits. The guide also covers recent enhancements made to the platform, such as the inclusion of the weighted harmonic mean. Also, the platform now allows a guest search so that a nonsubscriber can fully utilize the “Quick Search” and “Search” tabs to view limited information on the “Data” tab. Another enhancement was made to the download option for “Only Displayed Fields” and “All Available Fields,” which now includes a second worksheet, which contains the “Summary” tab information (so users have a record of their search criteria, their selected/deselected transaction IDs, and their summary statistics). You can find the updated Companion Guide if you click here.

Extra: Attend a free Zoom session on March 11 that will give an overview of DealStats as well as a live demo.

Credential program for value growth advisors June 7-11

A natural extension to valuing a business is advising business owners on ways to maximize that value. A training and credentialing program is available for valuation professionals who want to add this type of advisory service to their practices. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. The next CVGA program is scheduled for June 7-11 and will be in a virtual environment. For more details, click here.

Global BV News

New IVSC paper on business valuations and ESG

Although there is an increased awareness in environmental, social, and governance (ESG) factors, there is no common approach on how to reflect ESG in business valuations. That’s the topic of a new perspective paper from the International Valuation Standards Council (IVSC) that represents an early step “on the path toward a more systematic approach to the incorporation of ESG into business valuation practice and standards,” the organization says. The IVSC had a recent panel discussion, Unlocking the Value of ESG, and a recording of that is available. The IVSC would like to hear your views on this paper and on ESG as it relates to valuation. Share your feedback through the IVSC Group page on LinkedIn or by emailing contact@ivsc.org.

For more reading on the topic, see KPMG’s Quarterly Brief—International Valuation Newsletter for the first quarter of 2021. The KPMG brief suggests an approach to viewing business valuation through an “ESG lens” that involves assessing the ESG impact on cash flows and the discount rate and using probability-weighted scenarios.