• Another big win for ESOP valuations vs. the DOL

  Valuation experts have long maintained that the Department of Labor (DOL) has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. But a court has rejected the valuations the DOL did in a case alleging that an ESOP overvalued (and thus overpaid for) the stock of its sponsoring company. The case involved an ESOP set up in 2004 by TPP, an architectural firm in Atlanta. The DOL had a long winning streak in these cases, but that ended last year with the Bowers case, which was a major win for the ESOP community. With this new case, the tide continues to turn against the DOL.

  Issue of control: The initial draft valuation done for the trustee included a 23% minority discount, but that was eliminated in the final valuation report when it was agreed that a number of “control mechanisms” were to be put in place. The DOL’s position has been that a minority discount must be applied unless the ESOP has “total and unfettered” control of the sponsoring company. In this case, the ESOP owned 51% of the sponsoring company’s stock, but a number of the other control mechanisms were never put in place. Therefore, the DOL expert’s valuation was prepared on an “as is” basis (so a minority discount was baked into the valuation)—plus he deducted an extra 10% for certain factors. But the court rejected the DOL’s valuation in favor of valuations done by an expert from Stout, who testified on behalf of the defendants.

  The case is Walsh v. Robert N. Preston, et al., Case 1:14-CV-04122-ELR, U.S. Dist. Court, Northern District of Georgia, Atlanta Division, Filed 09/20/2022.

  Stay tuned: This is a long case with other valuation issues (including the use of forecasts and company-specific risk), so watch for further commentary. Also, a full case digest and analysis as well as the court opinion will be available soon on the BVLaw platform.

  Extra: In separate news, the ESOP Association has petitioned the DOL to (finally) “provide clear regulation and guidance as Congress directed.” The valuation community has been waiting (four decades) for the DOL to finalize regulations that were proposed way back in 1988.

  Great turnout for the AAML/BVR National Divorce Conference

  The AAML/BVR National Divorce Conference harkened back to prepandemic times as family law attorneys and valuation experts met in person in Las Vegas September 18-20. The AAML is the American Academy of Matrimonial Lawyers. There were hundreds of attendees on-site, a dozen exhibitors, networking dinners, and some excellent sessions co-presented by attorneys and valuation experts. Here are some quick takeaways:

• Companies have three years to file for the Employee Retention Tax Credit—this could potentially be a tax asset hidden by the business owner spouse;
• The first place to look for hidden cryptocurrency is tax records (the first page of the 1040 asks about it);
• Attorneys should help the expert tailor his or her report and testimony to the learning style of the specific judge;
• In divorce courts, comparability using the market approach is very narrowly defined, unlike in tax matters;
• To estimate goodwill in some states, the excess earnings method is the “most used and abused method,” but “works great if done correctly”;
• Judges like to do a side-by-side analysis of opposing experts’ valuations to help make their final decision (for an example, see “How Judges Compare Competing DCF Analyses,” in the July 2022 Business Valuation Update);
• When doing valuations of hedge funds or private equity, examining audited financials is “critical”;
• When testifying, watch your body language—it represents 55% of your total communication; and
• Bring in a specialist if you need help with issues outside your wheelhouse, such as intellectual property, reasonable comp (vocational expert), businesses that own real estate, etc.

Detailed coverage of the conference will be in the November issue of Business Valuation Update.

Take a fresh look at your long-term growth rate, says Grabowski

Do you estimate a long-term growth rate by taking long-term real GDP growth plus expected inflation? If you do, you may want to reconsider, according to recent research by Roger Grabowski (Kroll) and Ashok Abbott (West Virginia University). Grabowski conducted an interesting session at the recent ASA 2022 International Conference in Tampa, Fla., and he says that common approach is wrong. Reason: GDP includes both existing firms and new firms, whose growth is driven by acquisition. GDP growth is being driven by firms such as Amazon and Apple—businesses that did not exist 20 years ago—so you can’t assume your subject company will grow at the rate of GDP, he says. Therefore, the expected long-term growth rate should reflect “organic” growth, so the effect of the acquisitions should be backed out.

Grabowski cites research that estimates real long-term growth in aggregate corporate earnings at 3%, with 2% attributable to new companies. Therefore, the long-term average real earnings for existing businesses (i.e., organic growth) is equal to 1%, or one-third. This means your subject company will, on average, grow at the rate of one-third of real GDP plus inflation.

Comments wanted on AICPA draft of business combinations guide

The AICPA seeks comments on its newly released Draft Accounting and Valuation Guide, Business Combinations. This guide provides guidance and illustrations regarding the accounting and valuation considerations for business combination transactions. It addresses many accounting and valuation issues that have emerged over time and will help preparers, auditors, and valuation specialists understand and comply with the requirements of FASB ASC 805, Business Combinations, and FASB ASC 820, Fair Value Measurement. Comments are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

Healthcare compensation and productivity data workshop October 4-6

The American Association of Provider Compensation Professionals (AAPCP) is a relatively new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and valuation. The group is having a three-day Provider Compensation and Productivity Data Workshop October 4-6, which will be virtual. While the event is targeted to teams that manage provider compensation for organizations, it includes topics of interest to healthcare valuation professionals. For details, click here.

Global BV News

EACVA and IVSC launch European BV magazine