Court OKs including PPP loan in cash flows for CCF

In a Vermont divorce case, the valuation expert for the husband valued his business by excluding proceeds from a Paycheck Protection Program (PPP) loan as a one-time windfall for purposes of a capitalized cash flow (CCF) analysis. The wife’s valuation expert also did a CCF analysis but included the loan proceeds in the cash flows, which resulted in a higher valuation.

Current practice? The wife’s expert told the court that, currently, valuation professionals tend to leave PPP income in cash flows because the intent of the PPP program was to replace lost income and encourage employers to keep employees on the payroll. The husband’s expert noted that “reasonable experts could differ” on the matter.

The court found the wife’s expert’s testimony more convincing and adopted that expert’s higher valuation, and the state’s Supreme Court affirmed.

The case is Griggs v. Griggs, 2023 Vt. Unpub. LEXIS 18; 2023 WL 2473542, and a case analysis and full court opinion are on the BVLaw platform.

More on Hitchner’s myth-busting regarding restricted stock

A few weeks ago, we covered the start of Jim Hitchner’s list of BV myths he is out to bust. One of them is that restricted stock studies and data cannot be relied upon (either solely or along with other methods) to determine a discount for lack of marketability (DLOM) for federal tax business valuations. This is “patently false,” he writes in the April issue of Hardball With Hitchner.

IRS view: From the IRS’ perspective, it appears that nothing has materially changed from its established stance that the use of restricted stock studies for estimating DLOM is an acceptable method. As of this past October, the IRS had no plans to update its DLOM Job Aid the agency issued in 2009, according to a blog post by Mike Gregory (Michael Gregory Consulting), former IRS manager, who worked on the Job Aid. Gregory’s post also includes a list of different types of entities and the various DLOM methods he believes the “IRS may consider more positively in general,” and restricted stock studies are prominently included.

Also in the April Hardball issue, Gregory affirmed that the IRS “continued to accept the benchmark restricted stock studies using the Mandelbaum factors and Stout restricted stock database to determine DLOMs.” He also recommended that valuers should not rely on a single method but should consider multiple approaches.

New app estimates ESG adjustment to SME cost of capital

In March, we reported that Valutico, a web-based valuation platform, would be adding new features, including integrating environmental, social, and governance (ESG) factors into a valuation. That feature is now available, and it is named ValutECO, released in an alpha version, meaning feedback is being solicited for further development. Interestingly, Valutico is using this add-on for its own ESG efforts—100% of the user fee will be donated to the World Land Trust Charity.

ROT adjustment: The add-on is designed for private small and medium-sized enterprises (SMEs) and will, as a general rule of thumb (ROT), apply an approximate 0.08% discount to the cost of equity and about a 0.09% discount to the cost of debt for every 10-point improvement in a company’s ESG score. The score is developed using a 29-question assessment and is “broadly consistent” with the S&P Capital IQ ESG scoring mechanism. The score is fed into a proprietary algorithm to come up with the adjustments.

Of course, valuation experts should have many questions about this app and its inner workings. Research on ESG and valuation so far finds a weak link between ESG and profitability but a stronger link to cost of capital. The app’s developers warn against double counting if ESG impacts are reflected in cash-flow forecasts. They also point out that currently there are no universally accepted standards for ESG scoring or for ESG valuation analysis. For some FAQs on the new app, click here.

Valutico, launched in 2017, has a team of 60 employees based in Vienna with subsidiaries in the U.S. and UK. The company says it currently has around 600 clients in over 85 countries.

BVR set to launch latest benchmarking survey

Since 2007, BVR has been surveying BV firms and practices, collecting the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, resources used, and more. BVR is putting the finishing touches on the latest version of the survey—and this time we’re kicking it up a notch.

New twist: We will be using the information to identify best practices of top-performing BV firms based on the metrics that matter the most. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Also, we’ve trimmed the survey down a little, so it is not as long as previous versions, making it easier to participate.

What’s more, BVR has partnered with leading BVFLS practice management expert Rod Burkert (Burkert Valuation Advisors) to help ensure the survey and resulting study will be of the most help to BV practices.

Keep an eye out for the survey, and more details will be forthcoming!

Cost of Capital Navigator now has a company-level beta module

Kroll has added a new module to its Cost of Capital Navigator that allows users to estimate their own industry CAPM betas by providing levered, unlevered, and relevered individual company betas. Users can select multiple companies using Kroll’s company lookup tool to calculate five different beta estimates and perform sensitivity analysis using different currencies, stock return frequencies, lookback periods, and market indices. The module will be enhanced later in 2023 with such features as the ability to archive beta estimates for future use, beta trends over time, sensitivity analysis by adding/removing different beta types, and more. For more information, click here.

First issue of Willamette’s Perspectives is released

A new digital publication, Perspectives, which will be a quarterly, has replaced Willamette Management Associates’ Insights publication. The first issue is out now, and you can access it if you click here. The articles in the premier issue are:

• “Incorporating ESG Performance in Equity Valuations” (Nathan M. Hesch);
• “Key Considerations Regarding the Valuation of ‘Small’ Businesses” (John Sanders Jr. and Dakota Ask); and
• The Tax Benefits and Challenges of Allocating Total Business Goodwill to Personal Goodwill in a Transaction (Lisa Tran).

The editors for this issue are Charles Wilhoite andScott Miller.

Global BV News

IVSC issues exposure draft for updated IVS

The International Valuation Standards Council (IVSC) has published an exposure draft outlining proposed updates to the International Valuation Standards (IVS). To download the draft, click here. The public comment period will last for three months and will end July 28. In the meantime, the IVSC will conduct a series of webinars on the exposure draft. The first webinar will be on May 9. An updated version of IVS is expected to be published in January 2024 with an effective date of July 2024. During the comment period, interested parties can submit comments through the IVSC’s online consultation platform or via email to IVSC technical director, Alexander Aronsohn (aaronsohn@ivsc.org).

The exposure draft includes IVS updates that address various factors, such as ongoing changes in global markets and valuation practices, increasing use of technology and data sources, growing demand for clarity in valuation processes, and the need to address new types of assets and liabilities, including environmental, social, and governance (ESG) factors.