Major win in ESOP valuation case vs. DOL

A district court has ruled “decisively” against the Department of Labor (DOL) in an ESOP valuation case, stressing that the DOL failed to follow standard valuation practices. “The decision is one of the most comprehensive rebukes of DOL arguments in valuation cases,” says Corey Rosen, founder and senior staff member of the National Center for Employee Ownership (NCEO), in a blog post.

The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and it involved the ESOP company Bowers + Kubota (an architecture and engineering firm). The DOL had alleged that the ESOP paid more than fair market value for stock of the sponsor company. Valuation experts have long maintained that the DOL has been playing by its own valuation rules—rules that are not consistent with accepted valuation standards.

Stay tuned for more coverage of this important case. A copy of the opinion is available on the BVLaw platform, and a case digest analysis will be available soon.

Value of Coke’s secret formula could end up in Supreme Court

At last week’s New Jersey CPA Society’s Business Valuation and Litigation Services Conference, Barry Sziklay (Friedman LLP) gave an update on the huge battle between Coca-Cola and the IRS over transfer pricing that involves the trademark and secret formula for the soda giant’s iconic beverage. Coke is facing a more-than-$3 billion tax bill in a dispute over the valuation method used for determining the royalty charged to suppliers that provide the soda concentrate to bottlers.

Not refreshing: Coca-Cola had been using a “10-50-50” method that the IRS had approved in the wake of the agency’s audit of the company for the years 1987 to 1995. The approval came in the form of a closing agreement executed in 1996 between the company and the IRS. Going forward, the company continued to use that transfer pricing method for 11 years with the approval of the IRS. Then, when the IRS audited the company for its 2007-to-2009 tax years, the agency did an about-face and rejected the “10-50-50” method in favor of the “comparable profits method” for apportioning income between the U.S. parent company and its foreign supply points (i.e., manufacturers who produce Coca-Cola concentrate using The Coca-Cola Co.’s secret formula, which they, in turn, sell to unaffiliated bottlers who turn the concentrate into the soft drink retailers sell worldwide).

The 10-50-50 method permitted the supply points to retain as profits 10% of their gross sales with the balance of the profit split 50-50 between the parent company and the supply points. The comparable profit method (set forth in U.S. Treasury Reg. Sec. 1.482-5) attempts to determine an arm’s-length apportionment result based on the amount of operating profit an uncontrolled “comparable” company would earn in comparison to the subject company (The Coca-Cola Co. and subsidiaries). In this case, the IRS expert based his analysis on a return-on-assets metric. Result: an approximate more-than-$9 billion increase to the company’s taxable income and a more-than-$3 billion bill for back taxes. The matter went before the Tax Court.

On Nov. 18, 2020, the Tax Court judge ruled in favor of the IRS. Sziklay told the conference audience that, on June 21, 2021, Coca-Cola filed a “motion for reconsideration,” which includes a separate motion requesting that all Tax Court judges rule on the case, not just the one who rendered the original decision. “Stay tuned,” says Sziklay. “This case could end up before the U.S. Supreme Court.”

Sziklay points out that this is a very important case because transfer pricing is becoming ever-more important as the world moves toward a global minimum tax regime as the Organization for Economic Co-operation Development has articulated in its July 2021 issuance of OECD/G20 Base Erosion and Profit Shifting Project, “Addressing the tax challenges arising from the digitalisation of the economy.”

You can find the Tax Court opinion and continuing coverage on BVR’s BVLaw platform. The case is: Coca-Cola Co. v. Comm'r, 155 T.C No. 10 (Nov. 18, 2020). Also join the Gift and Estate Tax Valuation Update with Barry Sziklay on October 19.

Today! Take a fresh look at the GPC method

What are the best sources of data for the guideline public-company (GPC) methodology when valuing a closely held interest? How do you narrow down the initial comps? What about adjusting for size and growth differences from the subject business? Get the answers to these questions and more from veteran valuer Rob Schlegel (Houlihan Valuation Advisors). He’s conducting a webinar today, September 29, titled Relying on Guideline Public-Company Data in Appraisals of Closely Held Interests, and you can register if you click here (no charge to holders of BVR’s Training Passport Pro).

2021 Johnson/Park DLOM study is now available

The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a recent BVR survey. The method highlights the relation of the DLOM to the return on the investment and quantitatively measures the impact of the rate of return as a function of the DLOM. This methodology has been used in several tax court cases including the first family limited partnership (FLP) case to go to trial. The “2021 Discount for Lack of Marketability Study” provides objective rate-of-return measures to implement the Johnson/Park empirical method and includes a thorough explanation and example on how to apply these data.

Did you ever value a bar or nightclub?

If so, then BVR wants to hear from you! We are preparing the newest in our What It’s Worth series of special reports, and it’s on bars, nightclubs, and adult entertainment venues. We already have an expert on the adult clubs, but we need some help on bars and nightclubs, i.e., value drivers, risk analysis, unique operational considerations, M&A landscape, a sample valuation report (redacted), etc. If you can help us, please contact the BVWire editor at andyd@bvresources.com. Thanks!

Global BV News

Market risk premium reverts in Germany

Recent analysis on the German market suggests that the perceived risk of equity investing has dropped back to its precrisis levels, according to Alvarez & Marsal, which does a regular analysis of pricing dynamics in Germany. In terms of pricing levels, forecasted 2021 EV/EBITDA multiples rank significantly above historical levels for certain industries. “In a 10-year comparison, Healthcare, Energy & Materials and Software & IT rank highest among industries, while Retail & Wholesale Trade is priced at a significant discount,” the report says. You can read the full report, “A&M Germany: Valuation Insights,” September 2021, if you click here.

New push to explore realignment of intangible asset disclosures

Long overdue is a re-examination of the reporting and disclosure framework for intangible assets (IA). Even though IA is a powerful driver of corporate value, only a small fraction of it shows up on balance sheets. And what’s disclosed bears no relation to the total amount of IA because so much of it is internally generated and not required to be disclosed.

Series of papers: “Time to Get Tangible About Intangible Assets” is the first paper in a three-part series from the International Valuation Standards Council. The paper’s subtitle reveals its goal: “The case for realigning reporting standards with modern value creation.” Like a predecessor IVSC series on goodwill, the paper is well thought out and written by Kevin Prall (BDO), IVSC business valuation technical director, with contributions from the IVSC Business Valuation Board. The second paper in the series will take a deeper dive into the issue, and the third paper will present an analysis of potential frameworks.

The dollar amount of IA has hit $15 trillion worldwide—but this is just IA that has been disclosed, that is, the IA that has been acquired through third-party transactions—and it’s only a small fraction of the total. During a recent webinar, respondents were asked: “How strong do you think is the quality of global IA disclosure today?” Only 5% of respondents said “strong,” while 35% said “weak,” with the majority (59%) saying “mixed.” The need is definitely there for a fresh look at this issue.

Expelled partner should get FMV—but of what?

An Oregon appellate case deals with compensation for a partner’s 25% interest in a business after he is expelled from the firm. The trial court allowed for discounts for lack of control and marketability from the fair market value of the partner’s 25% interest. But the appellate court noted that the firm’s operating agreement called for compensation at 25% of the FMV of the assets of the business—not the interest in the business. The case was remanded back to the trial court for recalculation, sans discounts.

The case is Dipak Patel v. Siddhi Hospitality, LLC et al, 312 Or. App. 347 (June 16, 2021), and the case digest analysis and full opinion are available on the BVLaw platform.

Damodaran’s strong feelings about ESG

A year ago, Professor Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” He was talking about environmental, social, and governance (ESG) factors. He got some pushback and felt a “little guilty” of hyperbole, so he kept an open mind about it. Over the past year, he read all of the arguments in favor of it and heard from people who disagree with him. Has Damodaran changed his tune? “I am more convinced than ever that ESG is not just overhyped and oversold, but it’s become a gravy train for all the people who make money on ESG, and none of those people are in the groups that ESG is supposed to help.” In a recent blog post, he argued that the difficulty of determining whether a company or fund was “good” in terms of ESG makes the measure difficult to apply. Plus, he contends that the practical benefits of a strong focus on ESG in terms of metrics such as the cost of capital are “muddled.” You can read his blog post and watch his video on ESG if you click here.

Extra: ESG ratings have issues. Read the article “Warning to Business Valuers Looking to Use New ESG Ratings” in the October issue of Business Valuation Update.

New online tool for valuing fractional interests

This October will see the launch of the Partner Value Expert (PVX), an online application that represents a new approach to valuing fractional interests involving real estate. The developer, Dennis A. Webb (Primus Valuations), gave an explanation of the new application during a recent BVR webinar. Webb is a real estate appraiser as well as a business valuation expert who has specialized in fractional interests for almost 25 years. The application has been in development for six years and is also explained in Webb’s new book, Valuing Fractional Interests in Real Estate 2.0. The approach relies primarily on income methods using public limited partnership and REIT market returns. During the webinar, he presented the updated methodology by examining the methods in use today and understanding how and why they are replaced by or used in the new approach. He also stressed the importance of telling the story behind the valuation that makes sense to the user of your report. A recording is available of the webinar, 2.0: The New Breakthrough in Fractional Interest Valuation.

Extra: You can see PVX for yourself in the Exhibit Hall at the ASA International Appraisers Conference October 24-26 in Las Vegas.

Mercer chimes in on BVR DLOM survey

“Our profession has a long way to go in terms of understanding what DLOMs, or marketability discounts, really are,” concludes Chris Mercer (Mercer Capital) in his analysis of BVR’s 2021 DLOM survey. In his blog post, Mercer takes critical aim at the methods most respondents use for developing a DLOM, saying that the survey’s finding that 90% of respondents use restricted stock studies is “astounding.” The survey also found that 43% use pre-IPO studies, which Mercer says is “even more amazing.” He also comments on the use of the Mandelbaum factors and whether it’s appropriate to take a DLOM on a 100% interest in a private company.

Almost a quarter (22%) of valuation analysts polled in the survey say they use the quantitative marketability discount model (QMDM), a model Mercer developed. QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital).

In his blog, Mercer says that DLOMs are “not some magic thing that appraisers apply based on ‘Kentucky windage.’ They only exist to the extent that there are differences from the base value in terms of expected cash flow, growth and risk.” He also says: “Thanks to BV Resources for conducting the DLOM Survey and for sharing it with the appraisal profession.” The full survey results, including some interesting comments from respondents, is available if you click here.

Today! Valuation and legal experts examine latest cases

BVR legal editor Jim Alerding has hand-picked a number of the most consequential recent valuation and financial litigation court decisions for the next installment of our regular BVLaw Case Update webinars, which will be today. Joining him will be valuation expert James D. Ewart (James D. Ewart LLC) and family law attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP), who was directly involved in two of the cases that will be discussed. To register, click here (no charge to BVR Training Passport holders).

Global BV News

Multiples in China lower than year-end 2020

As of Aug. 31, 2021, earnings multiples (price to LTM earnings) for Chinese companies were lower overall than those at the end of 2020, with an average of 30.8x compared to 40.3x for year-end 2020, according to “China Transactions Insights—Fall 2021” from Duff & Phelps (a Kroll business). Healthcare, technology, consumer discretionary, consumer staples, and real estate sectors showed declines in earnings multiples since December 2020, while multiples for the industrials and materials sectors increased, the report says.

Trailing EBITDA multiples (enterprise value-to-LTM EBITDA multiples) for Chinese companies decreased on average 7% from year-end 2020 to Aug. 31, 2021. Healthcare, technology, consumer discretionary, and consumer staples showed declines in EBITDA multiples, with multiples for the industrials and materials sectors showing improvement through August.

The report has much more information and data on industry sector performance, IPO activity, COVID-19 recovery, cross-border investment, and more. 

New case to address goodwill impairment dispute

Goodwill impairment does not appear often in litigation, but a court case in Tennessee will go forward after a judge ruled not to dismiss the plaintiff’s claims. The plaintiffs brought a class action suit on behalf of those who purchased stock in Tivity (the defendants), which acquired Nutrisystem in 2019, and one of the claims involves goodwill impairment.

Inflated assets:The plaintiffs allege that the defendants impaired goodwill by inflating its assets and carrying a goodwill value that exceeded its implied fair value. They further allege that the defendants knew of multiple triggering events for impairment of goodwill but failed to impair and write down both the goodwill and the Nutrisystem trade name. In their motion to dismiss, the defendants countered that the claim failed to allege a misstatement, but their arguments were “unpersuasive,” so the case will proceed, the court ruled.

The case is Strougo v. Tivity Health, Inc., 2021 U.S. Dist. LEXIS 141711, __ F.Supp.3d __, 2021 WL 3209567. A case digest analysis and the full opinion are available on the BVLaw platform.

Frazier reviews ‘very important’ book on business valuation

A very comprehensive review of an important book is in the Summer 2021 issue of the Business Valuation Review™, published by the American Society of Appraisers. Veteran valuation expert William H. Frazier (W.H. Frazier & Co. Inc.) reviews the third edition of Business Valuation: An Integrated Theory, co-written by Z. Christopher Mercer and Travis W. Harms (both with Mercer Capital). The book is designed to demystify modern valuation theory and show how to apply fundamental valuation concepts. It also includes a detailed discussion of the quantitative marketability discount model (QMDM) for estimating a marketability discount. The book is a “very important contribution” to the business appraisal body of knowledge, writes Frazier. “I highly recommend my fellow business appraisers get a copy of this book and read it thoroughly—especially the parts you initially disagree with,” he concludes. “It will test and challenge your own theory. I know in my own experience, it has caused me to change the way I think about things—well, some of them anyway.” You can read the full review if you click here.

Extra: Did you know that you can find the full archive of past issues of Business Valuation Review™ on the BVResearch Pro platform? They go all the way back to 1982!

Jim Alerding joins BVR as legal editor

BVR is extremely pleased to announce that veteran valuation expert Jim Alerding, CPA/ABV (Alerding Consulting LLC), has joined us as legal editor. Jim will draw on his extensive appraisal and litigation experience to review and analyze all new business valuation-related court cases to be included in BVR’s BVLaw platform. He will also offer his perspective and commentary on the cases and other litigation-related matters. Jim worked closely with BVR’s former legal editor, Sylvia Golden, Esq., who passed away recently. Together, they did a regular webinar on BV-related court cases, and Jim will continue that tradition (the next BVLaw Case Update webinar is scheduled for September 22).

A highly respected valuation expert, author, and teacher, Jim has performed over 1,000 valuations and has testified over 400 times during his long career. In his current practice, he consults with business valuation professionals on a wide range of appraisal and litigation projects. Jim is a former member of the AICPA’s Business Valuation Committee and is the co-author of VS 100, which is the AICPA’s Statement on Standards for Valuation Services. He is in the AICPA’s Business Valuation Hall of Fame, and he is on the Editorial Advisory Board of BVR’s Business Valuation Update. He is a co-author of Financial Valuation: Applications and Models and has written or co-written four other books on business valuation-related topics.

BVR is very fortunate to have Jim with us, and we look forward to sharing his unique insights with readers.

Specialty pharmacies resilient amid COVID-19

The pandemic had less of an impact on specialty pharmacies than other types of entities, say speakers on a recent BVR webinar. What is a specialty pharmacy? There’s no standard definition, but it’s generally a pharmacy that dispenses specialty drugs, as opposed to a retail pharmacy that typically does not. Jarrod Barraza, a senior manager in the Healthcare Valuation Service Line at Horne LLP, was in the middle of valuing a pharmacy when COVID-19 struck. The pharmacy simply expanded its hours and started curbside pickup with relatively little impact to the business. Barraza also deals with dental practices, and he saw a sharp contrast. You can actually pinpoint the day that dentists’ cash flows stopped coming in—and then starting up again when restrictions were lifted and people started coming in again. People could forego certain dental visits, such as annual checkups, but that was not the case with specialty pharmacies.

Barraza co-presented the webinar, Valuation of Specialty Pharmacies—Practical Considerations, with Mike Gerling, president of Veros Health, who deals with mergers and acquisitions of specialty pharmacies.

New course on intangibles debuts at the October ASA conference

A new advanced course on the valuation of intangible assets will make its debut at the ASA International Appraisers Conference in Las Vegas. BV303—Valuation of Intangible Assets and Special Topics will take place October 21-24, prior to the main conference, which runs from October 24 to October 26. Students attending the class also receive a discount to the conference. The course instructor will be its developer, Ray Rath (Globalview Advisors).

There are a number of other preconference education sessions to choose from, including the four-day BV201 (Introduction to Business Valuation, Market Approach), BV203 (Introduction to Business Valuation, Asset Approach, Discounts and Premiums), and AR204 (Appraisal Review and Management Application) classes.

Two state CPA societies host BV events his month

Some state CPA societies organize business valuation conferences, and two of them are coming up later this month. Both events will be online only, and BVWire is looking forward to attending!

New Jersey: First up is this year’s Business Valuation and Litigation Services Conference, hosted by the New Jersey Society of CPAs, which will be a live webcast on September 21. The fine program includes sessions on cannabis, estate and gift, federal taxation, physician compensation, and a panel with a retired judge about expert witness testimony. To register, click here.

Virginia: The Virginia Society of CPAs (VSCPA) will hold this year’s two-day Forensic and Valuation Conference September 29-30. The agenda includes topics related to COVID-19, using statistics for lost profits, recent federal tax developments, goodwill, financial forensics tools, reasonable comp, and more. For more information and to register, click here.

Free webinar reveals what’s new in goodwill

The amount of goodwill on corporate balance sheets is at the highest level since 2017—and it’s growing. The possible change in the standards for accounting for goodwill has significant unintended consequences. This—and more—will be discussed on September 23 during a free webinar hosted by the CFA Institute, Calcbench, and Valuation Research Corp. The speakers will be from these three organizations, and they will be, respectively, Sandra Peters, Pranav Gai, and PJ Patel. To register, click here.

Global BV News

Initial agenda for IVSC Virtual AGM October 21-28

This year’s annual general meeting (AGM) of the International Valuation Standards Council (IVSC) will be held as a virtual program from October 21 to October 28. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. There will be more items added to the agenda, and you can see it if you click here. Some parts of the overall program are restricted to IVSC sponsor/member organizations or their representatives, but other aspects are open to anyone with an interest in valuation and the work of the IVSC.

Preview of the October 2021 issue of Business Valuation Update

Here’s what you’ll see:

• “Florida’s Proposed Change to Goodwill Could Set a Precedent” (Richard West, Esq.; Bruce Parisi, ASA, ARM; and Thomas Gillmore, CPA/ABV/CFF, CFE). The Family Law Section of the Florida Bar is proposing legislation to clarify the value of goodwill in the marital interest of closely held businesses. The authors envision that this proposed legislation could set a precedent for future family law matters throughout the United States.
• “Good News: Key Research on Private Cost of Capital Is Back” (BVR Editor). On the brink of ending its long run, the Private Capital Markets Project from Pepperdine University has secured funding to continue its ongoing survey of expected rates of return of providers in the private capital market.
•  “Updated Data Help Appraisers With RULs of Intangible Assets” (BVR Editor). To estimate the expected remaining useful life (RUL) of an intangible asset, it can be helpful to see how other appraisers have assigned RULs to similar assets in the subject industry. Data on 18 identifiable intangible types (also broken down by industry) culled from almost 16,000 purchase price allocations (PPAs) have been assembled into the third edition of Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations.
•  “Warning to Business Valuers Looking to Use New ESG Ratings” (BVR Editor). A hot topic today is environmental, social, and governance (ESG) factors and how to reflect the impact of these factors in business valuations and financial reporting. Data are starting to emerge to help quantify the impact of ESG—but analysts need to be careful in using these data.
• “Premium Gap Closes Between Strategic and Financial Acquisitions” (BVR Editor). The difference between the premium strategic buyers pay for acquisitions versus what financial buyers pay has decreased, according to recent data in the Factset MergerStat/BVR Control Premium Study.
• “COVID-19 Cloud Has Silver Lining in the Cannabis Sector” (BVR Editor). A good example of the varying effects of COVID-19 on different industries can be found in the cannabis sector. Of course, the pandemic has had devastating effects overall, but something interesting happened in this sector that allowed it to weather the storm fairly well, according to valuation experts close to the industry.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.

QMDM increases foothold in DLOM toolbox

Almost a quarter (22%) of valuation analysts polled say they use the quantitative marketability discount model (QMDM) for quantifying a discount for lack of marketability (DLOM). This percentage is double the results from our 2018 survey, when 11% reported that they use this method. We point out that this year’s survey had over 200 respondents, which is twice the number as the 2018 survey. The full results of BVR’s 2021 DLOM survey are available as a free download if you click here.

First introduced in 1997 by Chris Mercer (Mercer Capital), the QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital). They also discussed the model and went through several case studies in the final part of a three-part webinar series for BVR.

Asset vs. income approach for valuing goodwill in Tennessee

In Tennessee, personal goodwill is not a marital asset that can be divided between the divorcing parties. In a recent case, the wife owned a speech clinic operated as a sole member LLC. The wife’s expert valued the firm at $82,000 using the asset approach, reasoning that all goodwill was personal. The husband’s expert used the income approach and came up with a value of $790,000. The trial court sided with the husband’s expert but reduced the value by 14.3%, which was the percentage of revenue attributable to the wife. The husband appealed, raising several issues, but the state’s appellate court upheld the trial court’s decision. The case is Cela v. Cela, 2021 Tenn. App. LEXIS 304, 2021 WL 3240238 (July 30, 2021), and a case digest analysis and the full opinion are available on the BVLaw platform.

BVR releases updated data on identifiable intangibles

Data from almost 16,000 purchase price allocations (PPAs) are included in Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, 3rd edition, which has just been released. The guide includes useful life and value analytics for 18 types of identifiable intangibles and goodwill. The data covers PPAs from 2007 to 2019 and can help corroborate conclusions in a valuation analysis and assist preparers and reviewers of a useful life (amortization) estimate. Also, fully updated discussions give an overview of key accounting and intangible asset valuation guidance, insights on lifing, and an in-depth look at the five groupings of identifiable intangibles.

Raymond Rath (GlobalView Advisors), who acted as editorial advisor of the guide, conducted a webinar in which he discussed the data in the guide as well as his perceptions based on years of experience conducting and reviewing these types of engagements. You can view a recording of his webinar if you click here (free for holders of BVR’s Training Passport Pro).

New rules for FMV in healthcare should dull DOJ’s sword

The Department of Justice has taken an aggressive stance in fraud and abuse cases involving the measurement of fair market value of physician compensation. Hospitals paid huge fines to settle cases such as Tuomey, Halifax, Citizens, and North Broward. But, this past January, new regulations from the Centers for Medicare & Medicaid Services (CMS) went into effect that clear up some of the ambiguity that made hospitals easy targets for these lawsuits.

Brighter line: During a recent BVR webinar on physician compensation, an audience member asked: “Will the new regs reduce or eliminate the DOJ’s aggressive enforcement?” While it’s unclear that the new regs will eliminate it, there is now a “brighter line” in terms of knowing what potentially could create issues, especially with respect to the matter of “commercial reasonableness,” which has been a major issue in past enforcement actions.

Kathryn Taylor and Justin Conant (both with PYA PC) conducted the webinar, Physician Compensation and COVID-19: Then and Now and Now What? A recording is available if you click here. For additional insights, see the article, “New Ballgame for FMV in Healthcare Under Final CMS Rules,” in the August 2021 issue of Business Valuation Update.

Strong LEI performance continues, reports BVR’s EOU

In June 2021, the U.S. Leading Economic Index (LEI) rose 0.7%, to 115.1 points, reports the Economic Outlook Update (EOU) for the second quarter of 2021, published by Business Valuation Resources (BVR). The report notes that, following the rise, the U.S. LEI broke its previous record high reached in May 2021 and has fully recovered and passed its peak from before its contraction caused by the coronavirus outbreak. The Conference Board now forecasts real GDP growth in the second quarter could reach 6.6% for 2021 and 3.8% for 2022.

The 56-page Economic Outlook Update for the second quarter of 2021 contains expansive research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. To learn more, visit bvresources.com/eou.

DealStats Hall of Fame members for 2020

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2020 are:

·    Scott Bushkie, Cornerstone Business Services (Green Bay, Wisc.);

·    Bob Forbes, Forbes Business Investments (Greenwood Village, Colo.);

·    John-Erik Grain, Lee & Associates (Vancouver, British Columbia);

·    Greg Kells, Sunbelt Business Advisors—Ottawa (Ottawa, Ontario K1V 8N4); and

·    Al Statz, Exit Strategies Group Inc. (Petaluma, Calif.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Global BV News

ESG in the spotlight at IVAS-IVSC conference October 6-7

The leading business valuation conference in Asia Pacific has been the IVAS-IVSC Business Valuation Conference, and the next one will be October 6-7. Environment, social, and governance (ESG) factors as well as intangible assets are a major part of the agenda, and the conference theme is “Reframing Valuations: Intangibles, ESG, and Long-Term Value.” The event is organized by the Institute of Valuers and Appraisers, Singapore (IVAS) in partnership with the International Valuation Standards Council (IVSC). For more information and to register, click here.

Extra: The IVSC has published two perspective papers on the implications of ESG factors on business valuation, and they are available if you click here

Appellate court affirms zero DLOM for a 100% control interest

In a divorce matter, an Indiana appellate court has upheld the lower court’s decision not to allow a discount for lack of marketability (DLOM) on a 100% control interest in a business the husband owned. The business consisted of six dental practices, to which the husband applied a very high DLOM, primarily to reflect that most of the revenue was from Medicaid (according to him). The wife’s expert applied no DLOM to the valuation, and the trial court accepted it partly because the husband had shown no intention of selling the business. This is the first time the issue of intention to sell has arisen in Indiana in this context. The appellate court affirmed the decision of the trial court. There are some interesting points in the details of the case, which is Kakollu v. Vadmaludi, 2021 Ind. App. LEXIS 232; 2021 WL 3137204. A case digest analysis and the full opinion are available on the BVLaw platform.

Extra: BVR’s recent DLOM survey reveals that there is significant disagreement among valuation experts as to whether a DLOM is appropriate for a 100% control interest.

Sneak preview of updated data on identifiable intangibles

Get an advance look at the new edition of a guide that analyzes data on the useful lives of intangible assets culled from over 15,000 purchase price allocations. This will be part of a presentation by Raymond Rath (GlobalView Advisors) in an August 26 webinar that gives key insights on the determination of the economic and useful (amortization) lives for intangible assets. You’ll also get an overview of key accounting guidance pertaining to the valuation of intangible assets as well as industry-specific factors impacting the valuation and economic lives of different types of intangible assets. He will also discuss the data in the guide, Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, 3rd edition, which is available now. Tune in to the webinar by clicking here.

Surprising results in private cost of capital survey

Over half (58%) of privately held business owners believe their cost of equity is less than or equal to 12%, according to the “2021 Private Capital Markets Report” from Pepperdine University Graziadio School of Business and Management. Approximately 21% of respondents indicated their business cost of equity capital is in the range of 9% to 10%, the range most cited. These low figures indicate that there may be a misunderstanding among business owners about the returns that investors require.

The report is the result of an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers. We note that the majority of private firms that responded had 20 employees or fewer, with 46% having no more than five employees. Also, over half of them had annual revenues less than $1 million.

Respondents to the 2021 survey will receive the report for free and should have already received coupon codes for this and other reports. The codes will expire at the end of this month, so, if you are planning to use one of them, please do it quickly. For others, a small fee of $100 will be charged for the report, which is available if you click here.

Extra: Selected required rates of return from the Pepperdine survey are now included in the Cost of Capital section of the monthly Business Valuation Update.

IACVS NOTE:  The use of the term “cost-of-capital”, as used by valuation analysts is not universally understood by business owners as am “…expected ate of rerurn…”  Instead, most business owners associate “cost-of-capital” with their borrowing rate,  This misunderstanding has been commonly found over the last 25 years!  The Pepperdine survey does not make this misunderstanding clear when asking business owners about their “cost-of-capital”.

New paper on CEO tenure and firm value

If you’re valuing a business with a CEO who has been in that job for 20 years, is that a positive or a negative? A new research paper shows that there is a “hump-shaped CEO tenure-firm value relation.” That is, CEOs who stay on too long may be adversely impacting firm value. When do they wear out their welcome? The researchers say the average “turning point” is 14 years, and they note that even successful CEOs “may be associated with declining firm value over the later course of their tenure.” The paper adds to the longstanding debate about CEO term limits and examines existing literature on CEO impact on firm value and performance. To download the paper, click here.

Citizens to acquire Willamette Management Associates

Citizens Financial Group Inc. will acquire Willamette Management Associates, a leading valuation consulting and forensic analysis firm with offices in Chicago, Atlanta, and Portland, Ore. This acquisition will significantly expand Citizens’ valuation services division and put it “among the top valuation services providers in the country,” according to a press release. Citizens also says that it will also accelerate the build-out of its corporate financial advisory capabilities, which includes the 2019 acquisition of Bowstring Advisors and the 2020 acquisition of Trinity Capital Partners. Terms of the transaction, which is expected to close this quarter, were not disclosed, the release says.

Global BV News

Revised glossary included in updated IVS

One of the changes in the latest edition of the International Valuation Standards (IVS) is a revised glossary of terms. You can find a red-lined version that shows the changes from the prior glossary if you click here. Key point: The glossary defines certain terms used in the IVS, so it is only applicable to these particular standards. You’ll also see that it does not contain basic valuation, accounting, or finance terms.

The updated IVS have an effective date of Jan. 31, 2022. Valuers can use the updated standards before the effective date and will need to make clear which edition of the IVS they are using when preparing a valuation report. Among other revisions, there is a new chapter, “IVS 230 Inventory,” as part of the intangible asset standards. IVSC member and sponsor organizations are provided with digital copies of IVS. Nonmembers/sponsors can access IVS through the IVS Online portal.

ASA’s Johnnie White joins iiBV board

New Pepperdine report on private cost of capital released

The “2021 Private Capital Markets Report” is now available from the Pepperdine University Graziadio Business School. The report is the result of an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.

Range of returns: The survey reveals that loans have the lowest average rates (banks require a median return of 3.3% to 5.5% depending on loan size) while capital obtained from angels has the highest average rates (ranging from a median of 23% for later-stage financing to 43% for seed money). The full report contains details on each type of funding.

A BVWire poll found that 40% of respondents use this survey as part of their toolbox for estimating small-private-company cost of capital. The Pepperdine Private Capital Markets Project (details here) was originally launched in 2007 and was temporarily halted last year due to funding issues. Thanks to the ESOP Association and Employee Ownership Foundation stepping in as sponsors, the research has been able to continue. But, because of an ongoing funding gap, a small fee of $100 will be charged for the report. However, respondents to the 2021 survey will receive the report for free and should have already received coupon codes for this and other reports. The codes will expire at the end of this month, so, if you are planning to use one of them, please do it quickly. The 2021 annual report is available if you click here.

How many BV credentialed members are in the three U.S. VPOs?

The AICPA, American Society of Appraisers (ASA) and the National Association of Certified Valuation Analysts (NACVA) are the three main valuation professional organizations (VPOs) in the U.S. that issue business valuation credentials. How many members do these organizations have? Chris Mercer (Mercer Capital) revealed the figures during his session on the future of the profession at the NACVA conference this past June.

U.S. VPO 2021 Membership (BV Credentials and Candidates)                                              

National Association of Certified Valuators and Analysts (NACVA)*                6,075                

Association of International Certified Professional Accountants (AICPA)         3,300                

American Society of Appraisers (ASA)                                                          2,168

Total                                                                                                          11,543                                                                                                                                  

* includes 585 members of GACVA, NACVA’s group of international chapters.                                                                                                                

Note: The numbers for the ASA and NACVA are confirmed; the AICPA figure is an estimate. These numbers also include individuals with multiple credentials.

Changes coming: Mercer also set his analytic sights on the business of educating and credentialing by these three organizations, and his conclusions and predictions may surprise you. See the September issue of Business Valuation Update for all the details.

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues. Here are the most notable:

· Judicial dissolution/breach of fiduciary duty: Guge v. Kassel Enters. was decided on appeal under the Iowa “election-to-purchase-in-lieu-of-dissolution statute.” The Iowa Supreme Court decided that, because the parties’ experts had “both included transaction costs in their valuations under a net asset approach, the district court’s failure to reduce the asset values to account for the costs to liquidate the corporation’s assets warranted reversal.” Additionally, since there was no evidence of an intention to liquidate the company or its assets, the court declined to adjust for the built-in gains tax consequences urged by the majority shareholder. Guge v. Kassel Enters., 2021 Iowa Sup. LEXIS 81 (June 18, 2021).

· Marital/goodwill: In Maginnis v. Maginnis, an unpublished opinion, the Kentucky Appellate Court remanded the decision as to the value of the husband’s business for, among other things, the Family Court’s failure to consider an apportionment of goodwill between enterprise and personal goodwill. It also remanded for a reconsideration of the maintenance award to the wife since that award is based in part on the value of the business and the income of the husband. Maginnis v. Maginnis, 2021 Ky. App. Unpub. LEXIS 378; 2021 WL 2483877 (June 18, 2021).

·   Shareholder dissent: In Island Light & Power, the one-third shareholder dissented to a forced sale of the assets resulting in a liquidation of the company and of the shareholder Trust’s stock. In a resulting bench trial, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest the Trust held. Island Light & Power Co. v. Sara Golvinveaux McGinnes 2011 Trust, 2021 R.I. Super. LEXIS 48 (June 3, 2021).

Case digests and full opinions are available through BVLaw or the BVResearch Pro platform (along with over 4,000 other valuation-related cases).

The biggest challenges when benchmarking a client

Valuation experts seem to be evenly split on what they see as their main challenge when doing an industry analysis. During a recent BVR webinar, attendees were asked about that. Here’s what they said:

·    Finding the right industry (36%);

·    Finding a reliable data source (33%);

·    Getting local information (28%); and

·    Other (3%).

During the webinar (free recording available), Galen Pugh of BizMiner addressed these challenges. BizMiner is a 20-year-old data analytics firm that collects U.S. industry and geographic raw data from 15 different sources and reports on over 5,000 industry segments. Because of the granularity of the data, you can benchmark a client against industry peers by drilling down to a specific line of business. For example, under restaurants, you can find different types, such as Chinese, steakhouses, food trucks, and the like. And you can drill down geographically to a ZIP code.

An audience member asked: “How many years of data do you have?” The standard report goes back five years, but you can get a legacy report that goes back to 2001 for some industries, according to Pugh.

A free recording of the webinar is available if you click here.

CVGA program for value growth advisory services

A training and credentialing program is available for valuation professionals who want to advise business owners on ways to maximize the value of their firms. 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. This course is designed to help your clients increase company value by two to three times over a two-to-five-year period. The next CVGA program is scheduled for November 8-12 and will be in a virtual environment. For more details, click here.

Willamette focuses on tax and transfer pricing

Taxation-related valuation and transfer pricing issues are the focus of summer 2021 Insights from Willamette Management Associates. The articles cover:

·   Tax pass-through entities;

·   Intercompany transfer price analysis;

·   Income tax (Estate of Warne); and

·   A review of judicial decisions (Nelson v. Commissioner).

The editors for this issue are Ben R. Duffy andSam S. Nicholls. To download the articles, click here.

Global BV News

Cost of capital parameters in Europe as of June 30, 2021

ValueTrust has released an eighth edition (dated June 30, 2021) of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

·   The risk-free rate in Europe increased from -0.14% as of Dec. 31, 2020, to 0.33% as of June 30, 2021;

·  The implied market return is at 7.4% as of June 30, 2021, so, taking the risk-free rate of 0.33% into account, the implied market risk premium is 7.1%; and

·  The implied sector return (unlevered) of the energy sector increased from 4.0% as of Dec. 31, 2020, to 5.6% as of June 30, 2021, which is the largest increase compared with the other sectors.

The full report is available if you click here.

Preview of the September 2021 issue of Business Valuation Update

Here’s what you’ll see:

• “Red Flags Appear in BVR’s DLOM Survey Results” (BVR Editor). There are a number of areas of concern in the responses to BVR’s recent survey on methodology and practice for estimating a discount for lack of marketability (DLOM).

• “Insiders Examine Michael Jackson Estate Valuation Dispute” (BVR Editor). Testifying experts for the estate give their main takeaways from this fierce dispute with the IRS.

• “Mercer Predicts a Shakeout in the U.S. BV Credentialing Landscape” (BVR Editor). Intense competition will trigger a consolidation among the three business valuation credentialing organizations in the U.S., predicts Chris Mercer (Mercer Capital), speaking at the recent NACVA conference.

• “Examining the ‘Reasonably Objective Basis’ Concept for Projections” (BVR Editor). Recent developments have raised the bar with respect to how valuation analysts document financial projections and forecasts with regard to a “reasonably objective basis.” But what exactly is this concept and where can analysts look for specific guidance.

• “SEC Comment Letters Reveal COVID-19 Impacts—and Much More” (BVR Editor). How to benefit from the great deal of useful information about fair value measurement issues in comment letters the Securities and Exchange Commission (SEC) sends after it reviews public companies’ financial statements and disclosures.

• “How Recent Insolvency Reform in the UK Impacts Business Valuations” (BVR Editor). Driven by the pandemic, the Corporate Insolvency and Governance Act (CIGA) 2020 is the largest reform to insolvency law in the United Kingdom in over 20 years. Although targeted to large companies, the impact on business valuation methods and standards will likely trickle down to smaller firms.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends.”

• Regular features: “Ask the Experts” and “Tip of the Month.”

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

• BVLaw Case Update: The latest court cases that involve business valuation issues.

Prince estate valuation featured on latest AICPA podcast

In the shadow of the recent court decision in the Michael Jackson estate valuation dispute, the estate of pop star Prince is currently locked in a fierce estate and gift tax dispute. The IRS argues the executor has seriously undervalued the estate, and the executors claim the IRS’ calculations “are riddled with errors.” Valuation experts Josh Shilts (Shilts CPA, PLC) and Heather Tullar (Valuation Research Corp.), who are both on the AICPA BV committee, discuss the case in the latest in a series of AICPA podcasts, which is available if you click here. In the 45-minute podcast, they talk about the complexities that arise when working on a multifaceted engagement with a wide spectrum of hard-to-value or highly specialized assets. The speakers point out that Prince was well known for keeping tight control over the release and use of his music and for aggressively enforcing his intellectual property rights. Also, he died without leaving behind a will.

Extra: Shilts is the consulting editor for the recently published BVR Guide to Management Projections and Business Valuation: Analysis and Case Law.

The most popular option model for estimating DLOM

Almost half (48%) of respondents to a recent survey say they use option pricing models to estimate a discount for lack of marketability (DLOM), and the Finnerty model is the one most cited, according to BVR’s DLOM survey. Over half (57%) of those who use option methods use John Finnerty’s option model, with the David Chaffe and Francis Longstaff methods almost tied for second place (27% and 25%, respectively). Ten percent of survey respondents use the models from analyst Stillian Ghaidarov. A few respondents noted that they use Black-Scholes, but studies have shown that actual market behavior is different than what Black-Scholes theory suggests. The survey allowed for multiple choices, which accounts for the total being over 100%. Top valuation experts never rely entirely on one option model.

BVR’s survey on DLOM methodology and practice garnered over 200 responses. The full results are available as a free download if you click here.

Extra: Ghaidarov has a new framework for DLOM and he is looking for feedback on it—see details in the July 2021 issue of Business Valuation Update.

Earnouts trigger higher returns in M&A deals

Valuation experts who advise in M&A should be interested in a new research paper that examines earnouts. The paper finds that earnout-based M&As yield higher returns relative to the acquirer than M&As without earnouts, particularly in small deals and those involving a great deal of intangible assets. “Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value,” the paper says. “The Real Effects of Earnout Contracts in M&As” is by Leonidas G. Barbopoulos and Jo Danbolt, who are both with the University of Edinburgh Business School in Scotland. The paper appears in the Journal of Financial Research.

A sad note …

BVR is deeply saddened to share the news that our executive legal editor, Sylvia Golden, has passed away. She contributed all of the legal-related news to BVWire, and she oversaw the BVLaw platform, building it up to a resource with over 4,000 case digests and court opinions of business valuation and damages cases. She also made valuable contributions to many of BVR’s books and guides. Sylvia was an attorney who received her J.D. from the University of California at Berkeley, School of Law, and was an active member of the State Bar of California. She left the actual practice of law for a career as a legal editor, and we here at BVR had the great privilege of working closely with her for years, but it was all too short a time. She was a joy and a pleasure to work with, and we will miss her greatly. Her incredible dedication to her work continued right up until her final days, and it brought her much happiness. BVR sends its sincere condolences to her family, friends, and colleagues. Sylvia leaves behind a great legacy—her insightful writings will benefit valuation professionals for many years to come.

D&P/Kroll survey of cost of capital inputs

During a recent Duff & Phelps (a Kroll business) webinar, the audience was polled on various valuation and cost of capital topics. One question asked about the sources used for the equity risk premium (ERP) and the majority rely on the D&P recommended U.S. ERP (see below).

Which Methods/Data Sources Do You Use as the Equity (Market) Risk Premium (ERP) Input in Your Cost of Equity Estimates?

                                                                                                                 

Duff & Phelps recommended U.S. ERP                                                57.5%

Long-term historical average                                                                    31.1%

Professor Aswath Damodaran’s implied ERP                                      23.7%

Supply-side ERP published by D&P                                                      22.8%

Other implied ERP sources (e.g., Market-Risk-Premium.com)           10.1%

Other/not applicable                                                                                     3.4%

Professor Pablo Fernandez’s survey of ERPs                                       2.3%

This question was multiple choice, and respondents could choose more than one answer. There was a total of 730 respondents to the survey (17% were D&P/Kroll employees, and 83% were external/third-party participants). The full results of the survey are available if you click here.

Carla Nunes and Jim Harrington of D&P/Kroll conducted the webinar COVID-19 One Year Later—Impact on Cost of Capital and Related Valuation Issues and discussed the impact of COVID-19 on global financial markets and cost of capital assumptions one year after the outbreak. A replay of the webinar is available if you click here.

Global BV News

Updated version of IVS released

The latest edition of the International Valuation Standards (IVS) has been released, and it has an effective date of Jan. 31, 2022. Valuers can use the updated standards before the effective date and will need to make clear which edition of the IVS they are using when preparing a valuation report. Among other revisions, there is a new chapter, “IVS 230 Inventory,” as part of the intangible asset standards. IVSC member and sponsor organizations are provided with digital copies of IVS. Nonmembers/sponsors can access IVS through the IVS Online portal.

Michael Jackson estate valuers give rare inside look

Experts for the estate of pop superstar Michael Jackson presented a fascinating look at how the valuations were done for the “tax trial of the century” in a BVR webinar. The case, Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-48 (May 3, 2021), triggered intense media attention and was closely watched by valuation experts because of the contentious issues involved. In dispute was the value of three assets: Jackson’s name and likeness, his 50% interest in a music publishing company (operating business), and an entity that held a catalog of music.

The webinar panel consisted of Jay E. Fishman (Financial Research Associates) and celebrity licensing expert Mark Roesler (CMG Worldwide), who worked together on valuing the name and likeness. Also on the panel was music industry financial advisor David Dunn (Shot Tower Capital), who advised on the valuation of the publishing entity and the music catalog.

Widely divergent opinions: There was a huge difference between the valuations of the estate and the IRS—so great that, if the government prevailed, the estate would have to pay an extra $500 million in taxes. Why such a massive difference? As in most cases, divergent values are the result of different assumptions and inputs (some legitimate and some questionable), and the panel went into great detail about these matters, including the valuation approaches, projections, discount rates, discounts for lack of marketability and control, tax affecting, and more.

In the end, the court sided with the estate on the name and likeness value and the value of the music publishing company. The court sided with the IRS on the value of the music catalog. On the issue of tax affecting, although the Tax Court had ruled in the Estate of Jones (2019) that tax affecting was appropriate, it ruled that the facts and circumstances in this case did not support tax affecting.

A recording of the webinar, Power Panel: Estate of Michael J. Jackson v. Commissioner, is available if you click here (free to holders of BVR’s Training Passport and subscribers to BVR’s Desktop Learning Center). A case analysis as well as the court’s opinion are available at BVLaw.

Full results of DLOM survey now available

BVR’s survey on methodology and practice for estimating a discount for lack of marketability (DLOM) garnered over 200 responses. The full results are now available as a free download if you click here. BVR has been conducting this survey for over 10 years, the last one being done in 2018. The survey asks about specific methods and tools used, such as restricted stock studies, option price modeling, pre-IPO studies, and much more. Respondents were also asked to provide some open-ended comments and observations about the way they estimate DLOM. Thanks to everyone who participated!

2021 EBITDA multiples down slightly, per DealStats

Despite the vaccination rollout starting in the first quarter of 2021, EBITDA multiples ticked slightly lower, to 3.8x, according to BVR’s DealStats Value Index (DVI) report for 2Q 2021.

The path of the coronavirus outbreak negatively affected EBITDA multiples, which

sharply declined in the second quarter of 2020, to 3.7x, when the initial economic shutdowns were implemented, rose to 4.3x in the summer period when the coronavirus numbers improved, and fell yet again by the fourth quarter of 2020, to 3.9x, as cases spiked in the winter (see graph below). Because there has been relatively little movement over the past three quarters, a trend or clear direction has yet to emerge regarding the direction of EBITDA multiples in the near future as the questions remain, new variants of the coronavirus continue to emerge, and a new administration starts to implement its economic policies. DealStats will continue to monitor the trends in the EBITDA multiple.

Today! Take a free tour of Bizminer’s industry data

Galen Pugh of Bizminer will conduct a free 50-minute webinar today (August 4) of its industry and market research database that covers over 5,000 industry segments. Market areas range from the U.S. down to the ZIP code, and it offers a variety of customizable reports. Pugh will give an in-depth look at the functions and features of the database as well as insights into how BV professionals are using its reports. To register, click here (one CPE credit).

Damodaran to conduct valuation training through IMAA

Professor Aswath Damodaran (New York University Stern School of Business) will conduct a 12-hour training class in valuation hosted by the Institute for Mergers, Acquisitions and Alliances (IMAA). The training will consist of four daily sessions (three hours each) from September 14 to September 17 (it will be repeated November 8 to November 11). The objective of the training is to provide the fundamentals of each approach to valuation, together with limitations and caveats on the use of each, as well as extended examples of the application of each. For more information and to register, click here.

Global BV News

IVSC adds to Financial Instruments Board

The International Valuation Standards Council (IVSC) has announced that four new board members will join its Financial Instruments Board, the group responsible for drafting and consulting on International Valuation Standards (IVS) for financial instruments. The new board members are: Larry Levine, a managing director at Lincoln International LLC, based in Chicago; Marcus Morton, a managing director, valuation services, at Duff & Phelps, A Kroll Business, based in London; Manish Saxena, a partner in valuation advisory services at Grant Thornton, based in Bangalore; and Stephanie Sparvero, the global head of Bloomberg’s Evaluated Pricing Service (BVAL), based in New York. These individuals will take up their positions in August on an initial three-year term.

Tax reporting loophole shields some cryptocurrency

Uncovering assets is a common challenge in many valuation and forensics engagements, and the challenge becomes even greater when cryptocurrency is involved. True, the IRS now requires taxpayers to disclose their cryptocurrency dealings. In fact, it put a question right near the top of the Form 1040: “At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?” The plain language of this question would lead you to believe that, if a taxpayer owns cryptocurrency, he or she needs to answer “yes,” but that is not the case.

Through the cracks: During a recent BVR webinar, a question from the audience was: Is tax reporting triggered if someone merely buys and holds cryptocurrency? The answer is “no,” say the speakers, Katerina Gaebel and Mark DiMichael, both with Citrin Cooperman. They pointed out that the IRS specifically addresses this in its FAQs on virtual currency transactions, which states: “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”

The bottom line is that you cannot completely rely on the Form 1040 to determine whether someone owns cryptocurrency. Nevertheless, tax forms do play an important role in uncovering cryptocurrency, but many more methodologies and tools need to be used. You can view a recording of the webinar, Cryptocurrency Fraud and Forensics: What Valuation Professionals Need to Know, if you click here (free to BVR Passport Pro holders).

Discounts inappropriate under controlling agreement, appeals court finds

In a buyout dispute involving a limited liability company, the Oregon Court of Appeals recently overturned a trial court’s decision to apply discounts when valuing the departing member’s minority interest. The controlling operating agreement required a valuation of the plaintiff’s proportional interest in the value of the entity’s assets, not a valuation of the plaintiff’s specific interest in the company, the appeals court found.

The plaintiff owned 25% interests in two LLCs, which separately owned and operated franchise hotels. Three fellow LLC members each owned equal shares in the remainder interests. The plaintiff felt unfairly treated by the other members and sued, alleging a number of claims, including minority oppression. The plaintiff also asked to have the LLCs buy out his two interests. The defendants filed counterclaims, asking for the right to expel the plaintiff from the companies.

‘Subtle but significant’ distinction: The trial court found that there was no oppression and that, under the entities’ operating agreements, the defendants had the right to expel the plaintiff. The court also found the operating agreements were controlling in terms of how to determine the compensation due to the plaintiff for his respective interests. Under the one agreement, the buyout price was to be determined “by multiplying the member’s percentage ownership interest by the fair market value of all LLC assets.” Under the second agreement, the buyout price was to be based on the company’s book value.

A valuation expert testified he was retained to determine the fair market value of the plaintiff’s 25% interest and that it was appropriate to apply a 10% discount for lack of control and a 20% discount for lack of marketability. The expert calculated that the fair market value of all of the company’s assets was $5.5 million and the value of the plaintiff’s undiscounted 25% interest was almost $1.4 million. The use of discounts reduced the value of the plaintiff’s interest by $385,000. The trial court adopted the expert’s value determination.

The plaintiff appealed, arguing, among other things, that, in the fair market value determination, the application of discounts was inappropriate.

The Court of Appeals agreed. It found that the operating agreement was controlling and the language as to how to value a departing member’s interest was unambiguous. The plaintiff was to be compensated “for his share in the fair market value of all the assets of the LLC, not for the fair market value of his share of the company,” the reviewing court emphasized. “The distinction is subtle but significant.” The court said the agreement did not provide a basis on which to justify discounts to reflect that the plaintiff’s ownership interest was a minority interest in a closely held company. Consequently, the trial court erred when it adopted this part of the expert’s value determination.

At the same time, the reviewing court dismissed the plaintiff’s challenge to the trial court’s determination of book value to compensate the plaintiff for his interest in the second LLC.

A digest of Patel v. Siddh Hospitality LLC, 312 Ore. App. 347 (June 16, 2021), and the court’s opinion will be available soon at BVLaw.

Interesting question on the Michael Jackson case

There were three main valuation matters in the case of the Michael Jackson estate versus the IRS, and the estate prevailed in two of them (see our most recent coverage here). During a recent BVR webinar, former IRS official Michael Gregory (Michael Gregory Consulting) discussed the case, and an interesting question came up from the audience. Gregory pointed out that the valuation expert for the IRS lied on the witness stand but not about his work on the estate valuation—the lies were about other matters. The judge did not exclude the expert’s testimony, instead saying that he would “discount the credibility and weight” he gives to the expert’s opinion of value. Had the expert not lied, what would the outcome have been? Instead of the estate going two for three, would it have been one for three? Would the IRS have prevailed in the case?

When a witness lies on the stand, it can be a fatal blow. That is, judges may discount or disbelieve everything the witness says. That extreme did not happen in this case, Gregory points out, because the judge sided with the IRS in one of the three matters. As to whether the overall outcome would have been different had the expert not lied, “it very well could have,” Gregory says, but “you never know.”

Extra: You can hear the testifying valuation experts for the Jackson estate give their inside view of the case during an upcoming BVR webinar, Power Panel: Estate of Michael J. Jackson v. Commissioner, on July 27. Don’t miss this one!

Pro golfer values analyzed in Duff & Phelps/Kroll study

Everyone who plays golf knows how confounding the game is. One day, you hit fairways and make putts, and, the next day, you’re in the rough and come down with a case of the “yips.” It even happens to pro golfers: One week, they’re on the leaderboard, and, the next week, they miss the cut. Wouldn’t it be great if the golf ball were made of crystal and you could see how you’ll do in the future?

New study: Using statistical analysis and mathematical modeling, Duff & Phelps/Kroll has estimated the present value of over 1,000 pro golfers’ potential earnings through age 50. The calculations account for three sources of income: tournament winnings, endorsement income, and projected earnings from the PGA Tour’s Player Impact Program. The study ranks the top 60 male professional golfers globally, as measured by their future career value (FCV). Rory McIlroy from Northern Ireland earned the No. 1 spot on the leaderboard, with $401 million in FCV, finds the study, “Measuring Their Shot: Study of Professional Golfers’ Future Career Value.”

It’s a fun and interesting study, and it explains the valuation and mathematical modeling principles used in the analysis. A 10% discount rate is used to calculate the present value of a player’s deferred income stream, which implies a low company-specific risk premium (or should we say a player-specific risk premium). Knowing how fickle the game is, some players would opt to take their FCV today and run to the 19th hole.

Reminder: Please take our DLOM survey

BVR is conducting a short survey that examines the methodologies and specific tools practitioners use to estimate DLOM. We’ve received a good number of responses so far but would love more, so, if you have not taken it yet, please do so by going to this direct link: surveymonkey.com/r/3Q2Z5NJ. It will take just three minutes, and all responses are anonymous. We’ve run this survey several times over the past 10 years, so it will be interesting to see what has changed over time. The survey results will be made freely available to everyone. Thanks for your participation!

CSRP working group needs input

The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia (CSRP) is seeking input via survey to understand how valuation practitioners address such premia within their valuations. While the Working Group’s focus is financial reporting, input from other practice areas is welcome and encouraged. Your input will help to prepare more formal guidance relating to the subjective area of cost of capital. All responses will be confidential. If you have not yet taken the survey, please do so by clicking here. Thank you in advance for participating!

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Free replays available for IVSC webinar series

Over 3,000 attendees from around the world listened to the recent International Valuation Webinar Series from the International Valuation Standards Council (IVSC). If you missed a session, the entire series is available for replay if you click here. The series, sponsored by Duff & Phelps, A Kroll Business, consists of five panel discussions, assembling over 20 leading experts from around the world, on topics such as the post-pandemic economic environment and its impact on valuation, the treatment of operating leases, IBOR reform, valuing alternative investments, and more

DLOM survey reveals methods of choice

The use of restricted stock studies remains the most cited methodology for quantifying a discount for lack of marketability (DLOM), according to the preliminary results of BVR’s 2021 DLOM survey. Nine out of 10 respondents say they use restricted stock studies, with the Stout study being the front runner (75% say they use the Stout study).

Option pricing models are the second most-cited methodology (48%), and 45% of respondents use pre-IPO studies. Rounding out the top five are the Johnson/Park empirical method (27%) and Mercer’s quantitative marketability discount model (22%). The survey had over 200 respondents, and multiple methods could be chosen in the survey questions. When asked how many methods respondents use in their analysis, 38% say they use two methods, 25% use three methods, and 21% use just one method.

BVR has been conducting this survey for over 10 years, the last one being done in 2018. The order of the five most-cited methodologies remains the same (see chart below) but the percentages for most of them have increased. We point out that this year’s survey had twice the number of respondents as the 2018 survey, so that may account for some of the changes.

DLOM Methodology	2021	2018
Restricted stock studies	90%	75%
Option pricing models	48%	42%
Preinitial public offering (pre-IPO) studies	45%	38%
Johnson/Park empirical method (Partnership Profiles)	27%	32%
Mercer's quantitative marketability discount model (QMDM)	22%	11%
None of the above	1%	n/a
Other	24%	23%

Respondents who checked the “Other” category cited such methods as cost of flotation (14%), Long-Term Equity Anticipation Securities (13%), VFC DLOM Calculator (7%), Ashok B. Abbott analysis (6%), and NICE (5%).

More next week: The survey asked more questions about DLOM methodology and practice, and we will have more results in next week’s BVWire. We will also make the full results freely available to everyone. Thanks to everyone who participated!

Kentucky appeals court explains state’s goodwill law

An unpublished opinion from the Kentucky Court of Appeals provides important insight into the court’s thinking as to the goodwill analysis trial courts must perform under the applicable state law when valuing business entities. Under controlling Kentucky law, only enterprise goodwill is a marital asset subject to marital distribution.

Scope of Gaskill: During the marriage, the ex-spouses started a chimney business. The husband worked as a chimney sweep, and the wife performed other tasks, including bookkeeping. The valuation of the company was important both for marital distribution purposes and determining alimony to the wife.

The wife relied on expert testimony from a CPA whose testimony and expert report included statements that 70% of the company’s value was personal goodwill and 30% was enterprise goodwill. The trial court accepted this expert’s overall valuation. At the same time, in determining the value of marital assets for property distribution’s sake and calculating income for alimony’s sake, the trial court disregarded the expert’s goodwill allocation.

The husband appealed the court’s findings on a number of grounds, including assigning error to the trial court’s decision to ignore the opposing expert’s goodwill analysis.

The Court of Appeals sided with the husband. The reviewing court first noted that the controlling case is the state Supreme Court’s Gaskill v. Robbins decision, which involved the valuation of an oral surgery practice that was organized as a sole proprietorship. In Gaskill, the high court adopted the distinction between enterprise and personal goodwill. Under the facts of Gaskill, the court found: “[T]here can be little argument that the skill, personality, work ethic, reputation, and relationships developed by [the owner spouse/doctor] are hers alone and cannot be sold to a subsequent practitioner.” Further, “[t]o consider this highly personal value as marital would effectively attach [the owner’s] future earnings, to which [the nonowner spouse] has no claim.”

In the instant case, the Court of Appeals invalidated the trial court’s judgment on this ground.

Moreover, the Court of Appeals dismissed the wife’s argument that Gaskill did not apply here because Gaskill dealt with a professional business whereas the contested business was a nonprofessional entity. The appeals court said it knew of no authority that definitively addressed whether Gaskill applied to valuing professional and nonprofessional business entities alike.

But, according to the appeals court, “though the issue may more often arise when valuing a professional entity, we conclude that Gaskill also applies to valuing nonprofessional entities.” Here, ignoring the expert’s unrebutted goodwill conclusions resulted in an approximately $200,000 increase in the marital portion of the company’s value, the Court of Appeals noted. In remanding, the appeals court ordered the trial court either to accept the expert’s goodwill conclusions and make the requisite apportionment of value or reject the goodwill analysis and provide a good explanation for doing so.

A digest of Maginnis v. Maginnis, 2021 Ky. App. Unpub. LEXIS 378; 2021 WL 2483877 (June 18, 2021), and the court’s opinion will be available soon at BVLaw. Subscribers also have access to a digest of Gaskill v. Robbins (II), 282 S.W.3d 306 (Ky. 2009), and the court’s opinion.

SEC comment letters uncover COVID-19 disclosures per PwC analysis

Valuable information can be gleaned about fair value measurement issues from comment letters the Securities and Exchange Commission (SEC) sends after it reviews public companies’ financial statements and disclosures. These letters are sent if the agency has questions or sees problems. PwC has posted its latest version of “SEC Comment Letter Trends” (comment letters publicly issued in the 12 months ended March 31, 2021), and the SEC has begun to issue comments related to COVID-19 disclosures. These comments focus on company-specific disclosures of pandemic-related risk factors and the discussion of known trends and uncertainties, including expectations of the impact on operating results and near- and long-term financial condition. Other topics of interest in the comment letters include business combinations, fair value (valuation techniques and inputs), and goodwill and other intangibles. Examining the issues in the comment letters can help you make sure you have addressed these areas properly in your own engagements.

Paper examines vanishing $10 billion of Sprint’s brand value

Prior to being acquired by T-Mobile in April 2020, Sprint had a brand with a value of $8 billion to $12 billion, according to all the major rankings of the most valuable brands. In August 2020, T-Mobile officially discontinued the brand. What happened to all that brand value? A new white paper from MARKABLES covers the whole story. It discusses the longevity of brand spending and the circumstances that foster a successful rebranding. One key finding is that digitized customer relations make branding and brands more dispensable. “It is one of the great misunderstandings of brand valuation—the impact of modern business models and customer relations on the longevity (and size) of brand value,” the paper says. The white paper is available for download if youclick here. MARKABLES is a provider of data designed to support the valuation of IP assets.

Updated data for estimating DLOC in closely held holding companies

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities. Updated versions (to January 2020) of two sources of CEF data, prepared by Bruce A. Johnson and James R. Park, are now available:

·  2021 Closed-End Fund Report: Fixed Income Securities. Use this report to compare privately held family limited partnerships (FLPs) and LLCs that hold money market funds, certificates of deposit, government bonds, municipal bonds, corporate bonds, or other fixed income investments.

·  2021 Closed-End Fund Report: Stocks and Equity Investments. Use this report to compare privately held FLPs that hold common stock, preferred stock, mutual funds, REITs, or other corporate equity investments.

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CBV Institute sees healthy membership growth