Big IRS red flag in fractional interest valuations

A discussion of who the partners are and what they are likely to do in the future is an essential part of a valuation of a fractional interest in real estate, advises Dennis Webb (Primus Valuations). For over 25 years, Webb has been specializing in valuing fractional interests and asset holding companies, and he spoke during a recent BVR webinar. The IRS will challenge a valuation that does not address the partners, which is a “huge issue” in these types of entities, he noted. The IRS will not be satisfied if the valuation merely assumes a generic situation that does not examine the other partners and their intentions. He recalled consulting with an IRS examiner about a valuation (not Webb’s valuation or client) that did not have this discussion in the report, and it ended up costing the client.

Webb is the author of Valuing Fractional Interests in Real Estate 2.0, and he also offers an online software application (a free trial is available).

Husband alleges wife foiled vet practice valuation

In a Kentucky divorce matter, the wife worked for the husband’s veterinary practice that he had purchased prior to their marriage. She admitted that, when they separated, she took a suitcase full of jewelry that was acquired during the marriage. Plus, she admitted that she did not fully comply with the court’s order to return all the jewelry so it could be accounted for and valued. The husband also alleged that she took business records that would establish the value of the practice at the time of their marriage. In its ruling, the court did not require the wife to account for the missing jewelry and it did not consider the date of marriage when valuing the veterinary practice. The husband sold the practice after the couple separated for $298,887, which was mostly goodwill (which the court found to be enterprise goodwill), and, thus, the court ruled that the sales proceeds were marital property.

The husband appealed and prevailed on the jewelry but not the practice valuation. The appellate court set aside the lower court’s judgment on the jewelry, so the wife has the burden to prove the disposition and value of the jewelry she did not return. But the court affirmed the lower court’s valuation of the practice and that the sales proceeds were marital property.

The case is Cummings v. Cummings, 2023 Ky. App. Unpub. LEXIS 116; 2023 WL 2052272, and a case analysis and full court opinion are on the BVLaw platform.

Technology is undervalued in M&A deals, per new survey

While technology is key in many companies’ operations, it “remains one of the most undervalued aspects in M&A transactions,” finds a new survey from Chief Executive, conducted in partnership with Elliott Davis, the tax, assurance, and consulting firm. The acquisition of technology assets ranked at the bottom of the list of factors influencing M&A decisions, behind top-line growth, revenue or operational synergies, accessing new markets, and the acquisition of skills/talent. True, top-line growth should be a primary motivator for any M&A, “but technology is a factor that can also turn a seemingly good ‘revenue deal into a failed transaction.’” The firm’s white paper gives an example of a seemingly good deal gone bad due to a lack of IT due diligence. The paper also includes key questions and actions to consider early in the M&A process to strengthen the understanding of the technology being acquired. The Elliott Davis white paper, “Maximizing M&A Value: A Guide to Evaluating IT’s Underlying Risks and Assets,” is available for download if you click here.

Global BV News

Emerging markets ramping up ESG efforts, per BCG

Although they had a slow start getting on the ESG bandwagon, emerging markets are catching up big time. And they are finding that sustainability efforts are a “powerful source of competitive advantage,” according to a new Boston Consulting Group (BCG) report. “Recent BCG research has found a strong correlation between emerging market companies’ scores in environmental, social, and governance (ESG) indexes as well as key financial and valuation metrics,” the report says.

BCG put together a list of 50 global firms it identifies as “climate pioneers” that have “generated total shareholder returns for investors that, cumulatively, were nearly 35% higher than the S&P 500 Index and 105% higher than the MSCI Emerging Markets Index from 2017 through 2022.” Valuation experts should also take note that firms are leveraging their high ESG scores into securing low-cost capital. The report is “The Sustainability Imperative in Emerging Markets,” which can be downloaded if you click here.

Global BV News: 2022 industry multiples down in Latin America

In terms of EV/EBITDA, multiples in Latin America have generally decreased in 2022 due to a pessimistic outlook and deteriorating market conditions, according to the third edition of Kroll’s “Industry Multiples in Latin America” (LATAM) quarterly report. All industries, with the exception of energy and utilities, finished 2022 with lower EV/EBITDA multiples when compared to December 2021. The full report, available if you click here, contains a detailed overview of EV/revenues, EV/EBITDA, P/E and P/B multiples of publicly traded companies in Latin America covering nonfinancial industries and market capitalization/revenues, P/TBV, and P/E and P/B multiples covering financial industries for which such data are available.

IVSC has a striking new logo

The first thing to notice about the new logo of the International Valuation Standards Council (IVSC) is the letter “V” and its distinctive design (see below). This reflects the prominence of valuation in overall business and investment decision-making, according to Richard Stokes, the IVSC’s director of communications and external affairs. “Our new logo puts a spotlight on valuation, and you will see our branding utilize and champion the valuation profession with this ‘V’ component used stylistically in isolation across some outputs,” he tells BVWire. He also pointed out that the break in the “V” creates a check or tick mark to emphasize that “valuation matters, and reliable, comparable and consistent valuation is vital,” he added. “The IVSC is focused on building trust in valuation and the standards can be seen as a reflection of global best practice; a sign of credibility and confidence.” The new logo is part of the IVSC’s refreshed branding, which is the first such effort since it was formed in 1981