DOL ESOP valuation regs coming by year-end

The Department of Labor (DOL) will issue long-awaited guidance on ESOP valuations by the end of this year, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.

Tide is turning: The regulation will clearly define “adequate consideration” under Section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA). It has been four decades since such regulations were proposed but never finalized. Valuation experts have long maintained that the DOL has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. After a long winning streak, the courts rejected the DOL’s valuations in several recent and important cases, alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies.

“Valuation regulations will have a profound impact on the creation and ongoing viability of ESOPs,” says Corey Rosen, NCEO founder and senior staff member, in the post. “The community must engage with the regulatory process to ensure they adequately accommodate the needs of ESOPs and ESOP participants, so the regulations do not discourage ESOPs.”

Valuation expert’s credibility takes several hits

In a New York fair value case, one of the 50% owners filed for dissolution and the other owner elected to buy him out. The valuation expert for the owner who would remain with the business relied solely on tax returns to base his valuation—even though his client controlled the books and records. The expert testified that he did not independently verify the financial information his client gave him. The court wrote: “It is troubling that an expert would purport to render a serious opinion on the Company’s value based only on its tax returns, knowing his client could easily have given him a more complete set of records.”

Plus, the expert concluded that the business had zero value, even though it was a going concern and his client would continue to operate it. “Indeed, that [the owner’s] expert could conclude based on the record evidence that the Company was worth $0 significantly undermines his credibility,” the court wrote. “The notion that the Company is worthless is belied by the significant value [the owner] continues to derive from it.”

In the end, the court relied mostly on the opinion of value from the departing owner’s expert but did make some adjustments, including to the growth rate, the multiple derived from the guideline transaction method, and the potential retirement of the remaining owner (for goodwill). There was no discussion of a discount for lack of marketability (New York does not take a consistent position with respect to this discount in fair value proceedings).

The case is Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035; 2023 NY Slip Op 32750(U), and a case analysis and full court opinion are on the BVLaw platform.

Private-company EBITDA multiples up in 2Q2023

After a downward slide in the fourth quarter of 2022 and the first quarter of 2023, the median selling price-to-EBITDA multiple has jumped to 4.0x in the second quarter of 2023 (see the graph below), according to the latest issue of the DealStats Value Index (DVI). In the period analyzed, EBITDA multiples across all industries were highest in the third quarter of 2018, at 5.0x, but then decreased until they bottomed out in the first half of 2022. Since then, EBITDA multiples have generally been trending upward.

The 30-page DealStats Value Index is a quarterly publication exclusively for DealStats subscribers. It provides trend information on valuation multiples and profit margins for transactions in DealStats, including multiples and margins by industry sector, interquartile range by sector and year, multiples and margins for private vs. public, and much more. If you are a subscriber to DealStats, you can download the current issue to see all the latest transaction trends if you click here.

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Worldwide support grows for the V20

The list of organizations that are supporting the V20 Valuation Summit and Conference October 27-29 in New Delhi is impressive—and growing. In a video, Saurabh Gupta, managing director of Assessors and Registered Valuers Foundation (AaRVF), explained that early support came from the International Valuation Standards Council (IVSC). Others followed, including the Insolvency and Bankruptcy Board of India (IBBI), International Institute of Business Valuers (iiBV), IACVS, Royal Institution of Chartered Surveyors, ASA, CBV Institute, and more.

Also, they are inviting other organizations and institutions to participate, including those from Singapore, the EU, Africa, and Asia. Gupta also mentioned support from several ministries within India and the G20 Secretariat. The V20 event coincides with the annual G20 finance meeting in India, and future V20 events will follow suit (next year will be Brazil).