Early results from BVR’s Benchmarking Survey

Almost 200 business valuation firms and practices responded to the BVR Benchmarking Survey, which closed last week. The survey, which has been conducted since 2007, achieved a 20% increase in responses over the prior version, so we thank everyone who participated!

Most of the respondents (60%) have business valuation as their primary business, while 23% say public accounting is their main business, with BV as a practice area. In terms of volume of engagements, there was a good mix of small and large practices, with about half of the respondents doing more than 50 engagements this past year and about a third doing one to 20 engagements. A few observations from the results:

• ·         The fastest growing BV practice area over the past year was in the income, gift, and estate tax area, which 26% of respondents cited;
• For 2023, the three most profitable practice areas will be income, gift, and estate tax; M&A/transactions; and litigation support;
• Two-thirds of respondents say their BV revenue will increase in 2023 versus 2022;
• Only a third of respondents have annual billable hour targets for staff;
• Most respondents (83%) say they do not have any type of quality control metric for their practices;
• Half of the respondents say they currently have no staff shortages, but finding and keeping good professional staff is a critical factor going forward;
• LinkedIn is the social networking site of choice for 80% of respondents;
• Seventy-four percent of respondents use Kroll’s Navigator for estimating cost of capital, followed by 35% who use BVR’s Cost of Capital Professional (some use both);
• IBISWorld is the source for industry research for 60% of respondents, followed by RMA, at 52%;
• Webinars are the most popular form of BV training, used by 80% of respondents; and
• Very few (7%) use any type of third-party valuation report writing software.

This is just the tip of the iceberg in terms of data and metrics collected from the survey. We are analyzing the results to complete the full report, and we will let you know when that is available. Also, BVR has partnered with leading business valuation, forensics, and litigation services (BVFLS) practice management expert Rod Burkert (Burkert Valuation Advisors), who helped design the survey and will use the results to identify the best practices of top-performing BV firms based on the metrics that matter the most. The idea is to determine what makes a good firm great.

Low buyback value stings departing owners

Shareholder-employees should take a lesson from a recent case and take a fresh look at their buyout agreements—especially the part about the redemption value. In the case, which was in New York, a law firm shut down after merging into another law firm. Several partners terminated instead of joining the new firm and were asked to surrender their shares in the old firm in return for a check in the amount of $100 for each partner, which was the book value of their shares.

No case: The partners sued, alleging breaches of their employment agreement and fiduciary duty. The court dismissed their claims. The employment agreements allowed for termination (by either party), so they were at-will employees, meaning there was no breach. The shareholder agreement included a mandatory redemption provision with a buyback price set at $100 per share. This was done to avoid future arguments over fair value, and the departing shareholders were bound by that agreement.

The case is Laurilliard v. McNamee Lochner, P.C., 2023 N.Y. Misc. LEXIS 3296; 2023 NY Slip Op 50671(U), and a case analysis and full court opinion are on the BVLaw platform.

A tip of the hat to our friends at the law firm of Farrell Fritz in New York for alerting us to another very interesting court case dealing with minority shareholders. They have a great blog, New York Business Divorce, that covers dissolution and other disputes among co-owners of closely held companies.

Caution: Mixed M&A landscape for physician practices

A rapidly changing and mixed transaction volume for physician practices signals caution to valuation analysts looking to historical transactions for guidance and comparables, advises a recent post from Weaver, the assurance, tax, and advisory firm. M&A activity in many physician specialties has been slowing, but some specialties are displaying M&A trends in the opposite direction, the firm says. These trends “highlight the importance for the valuator of understanding certain factors. These include the micro-environment of each physician specialty, specific factors affecting M&A transaction activity and the resulting valuation implications,” the post says, which includes an analysis of physician practice transaction volume data by practice specialty.

Extra: Mark Dietrich’s new book, Engagement Guide to Understanding and Valuing Medical Practice Specialties, includes his trade secrets from over 45 years in the healthcare arena. You already have this book in your library if you are a subscriber to the BVResearch Pro platform.

New book on ESG and BV

Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuationis a new book edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters. The book has two target audiences: practitioners and students in finance, so there is some very basic information as well as methodologies, a case study, and research advances. The book is available if you click here.

Global BV News

CBV perspectives on litigation

Young practitioners question traditional discount methodologies

“Outdated studies” and “emerging quantitative methods” are some reasons why young valuation practitioners are questioning the traditional methodologies for estimating discounts for lack of control and marketability (DLOC and DLOM). This was revealed during a Young Valuation Analysts Panel session at NACVA’s recent Business Valuation & Financial Litigation Super Conference. Challenging the status quo is one way the profession can evolve its thinking about methodology and practice.

The issue came up when a question was posed to the panel about the obstacles and challenges that they see in the profession over the next five years. In addition to examining new methods for estimating discounts, the panel mentioned M&A uncertainty amid difficult economic conditions and educating young professionals about the existence of business valuation as a profession. The panel included Todd Kutcher (Reliant Business Valuation), Coleton Benfatti (The Red Maple Group), and Ryan McKeon (Doeren Mayhew), and the moderator was Karen Kaseno (The Kaseno CPA Firm APC).

Current methods: Preliminary results from BVR’s Benchmarking Survey show that the FactSet Mergerstat/BVR Control Premium study is currently the most cited source for determining a DLOC, cited by 50% of respondents. As for DLOM, the traditional methodologies continue to be the most used, notably: restricted stock studies (53% use the Stout study and calculator, 34% use other historical studies); pre-IPO studies (26%); and Mandelbaum factors (66%). Thirty percent of survey respondents cited the use of option price modeling methods, which is up from 20% in the prior survey (2018).

Extra: In a separate session, Dr. Ashok Abbott discussed the Margrabe options approach to DLOM and offered attendees access to a new DLOM calculator he is developing that is in beta testing. You can access it at dev.optionmodeldlom.com. Dr. Abbott would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. His contact info is on the calculator.

Damages waiver precludes lost profits claim

In an Illinois case, a contract for consulting services for an online platform was terminated and the terminating party was supposed to return the source code to the other party but did not, breaching the contract. The plaintiff (a startup company) sued for lost profits based on what it would have earned had it been able to monetize the platform. A jury awarded the plaintiff $18.3 million in lost profits damages. But the defendant then filed a motion for a judgment as a matter of law, and the court overturned the award.

The contract contained a provision that waived liability for “consequential” (indirect) lost profit damages, as opposed to “direct” damages, which would be recoverable. The difference between direct and consequential damages in breach of contract claims lies in the degree to which the damages are foreseeable and highly probable, the court noted.

Strict interpretation:Illinois precedent is that “damages waivers should be strictly construed against the benefitting party.” In this case, the lost profits damages were deemed consequential and indirect, which the contract precluded. The focus of the contract was for the plaintiff to provide consulting services as an independent contractor, and they were fully paid for those services. There was no “additional link in the causal chain” to connect the damages to the contract. Therefore, direct damages would have been a portion of the value of the source code that was not returned to the plaintiffs. But they did not put a value on that, nor did they seek that value as damages.

Also, Illinois law does not permit recovery of expected profits for a new commercial business. But, since the damages were considered consequential and barred by the contract, there was no need for the court to address that issue.

The case is Endless River Techs. LLC v. Trans Union LLC, 2023 U.S. Dist. LEXIS 725; 2023 WL 24101, and a case analysis and full court opinion will soon be on the BVLaw platform.

Deadline soon for BVR’s benchmarking survey

Our thanks to the over 170 business valuation firms and practices that have responded to the BVR Benchmarking Survey. But the survey will be open through July 31, and we welcome more responses. The direct link to it is bvresources.com/2023bvsurvey. The survey collects information on operations, financial metrics, staffing, compensation, billing practices, marketing, tools and resources used, and more. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Private-sector companies optimistic, per McKinsey survey

Consulting firm McKinsey has some very useful economic and industry reports, research studies, and regular briefings. All of this material is free, and you can sign up for regular alerts on the McKinsey website. Its latest survey on company expectations shows that private-sector respondents report consistently positive views about their companies’ profit, demand, and workforce prospects. The survey has interactive graphs that show results by industry—click here to access it.

Second issue of Willamette’s Perspectives is released

The second issue of a new quarterly digital publication from Willamette Management Associates, Perspectives, has been released, and you can access it if you click here. This publication replaced the firm’s Insights publication. The articles in the second issue (July 2023) are:

· “Understanding the Implications of Cecil v. Commissioner” (Grant Crum);

· “How to Properly Use Asset Transactions in the Guideline Merged and Acquired Company Method” (Tia R. Hutton and Lisa H. Tran); and

·  “Getting the Most Out of Every Engagement” (Timothy J. Meinhart and Marc D. Bello).

Meinhart also served as editor for this issue.

Global BV News

Kroll reports on industry multiples

Two reports from Kroll have insights into trading multiples for various key industries as of March 21, 2023.

The Industry Multiples in Europe quarterly report (click here to download) is now in its sixth edition. One highlight: In terms of EV/EBITDA, multiples have generally remained relatively stable during the first quarter of 2023, with a few industries presenting significant variations. For example, the median EV/EBITDA multiple of semiconductors and semiconductor equipment increased to 15x (from 10x in the fourth quarter of 2022).

The Industry Multiples in Latin America quarterly report is in its fourth edition (click here to download). One highlight: During the first quarter of 2023, while median EV/EBITDA multiples have not changed significantly for many industries, some of them experienced notable decreases. For instance, in the energy sector, the median EV/EBITDA decreased 1.4x in the first quarter of 2023 in relation to the fourth quarter of 2022.

Call for papers for Valuation 20 in India October 27-29

There is a call for researchers, practitioners, policymakers, and industry professionals to contribute their commentaries and research papers on several important themes, including technology, ESG, and more. This is in connection with the V20 (Valuation 20) conference October 27-29 in New Delhi, India, co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Submissions of abstract papers are due August 18, and, if accepted, the final papers will be due October 1. For details on the call for papers, click here.

Takeaways from NACVA’s Super Conference

There were top speakers, interesting sessions, and a good turnout (about 200) for the three-day NACVA Business Valuation & Financial Litigation Super Conference in person in Snowbird, Utah (and also online). BVWire was there, and here are just a few of the takeaways from the sessions:

• Gray divorces are becoming more prevalent, and, when they happen at retirement age, a perfect storm ensues, which triggers increased opportunities for valuers/advisors;
• BV firms will get caught up in the wave of CPA firm consolidations—good margins and repetitive business make a very attractive M&A target;
• When developing a discount rate for damages, match the rate to the time frame of the damages, with future years being more risky than early years;
• More than ever, judges are focused on settling cases, which means more cases going to mediation;
• Market efficiency has become a new issue in the Delaware Chancery Court in appraisal cases—analysts can use efficiency tests accepted in federal class action security fraud cases;
• A veteran forensics expert set his analytic sights on the financial statements of the U.S. and concluded that the country is insolvent and getting worse;
• When assessing AI and ESG impacts on valuation, look to the fundamentals—unless there is an impact to cash flow, risk, or growth, these acronyms have no effect on business value;
• A new DLOM calculator using the Margrabe options approach was offered to attendees for beta testing; and
• Young BV practitioners need to see definite growth opportunities to keep them from jumping ship, such as getting credentialed, exposure to clients, travel to conferences, and chances to write sections of the valuation report and articles.

There’s way too much more to include here, so we’ll have more details in the September issue of Business Valuation Update.

Why should BV experts care about court cases?

That was a question posed during a preconference session at NACVA’s Super Conference last week. Cases set a precedent in the jurisdiction you are working in, pointed out Steve Brunner (VG Valuation Group), who conducted the session, BV Case Law Update. In other sessions at the conference, veteran valuation experts stressed the importance of knowing your jurisdiction and how the courts typically handle valuation issues—and they tailor their reports and testimony accordingly. Brunner also mentioned that he uses cases as a marketing tool—he may send a case, or he may do an article on a case and send it to attorneys.

Every week, BVWire alerts you to valuation-related court cases that are added to the BVLaw platform, which includes full opinions and case analyses covering about 4,300 cases, and about 70 are added each year.

Pereira method used for marital interest in construction firm

In a Nevada divorce case, the court considered whether the valuation of the marital portion of a separate property business should be calculated under the Pereira or Van Camp approach. The husband started the business prior to marriage and was a key person in its success.

The Van Camp method generally applies when business value is due more to economic forces than to the efforts of the spouse. Under this method, “if the in-spouse [the husband in this case] working for the claimed separate property business during marriage receives compensation that is equal to or greater than what is fair or reasonable for the services provided, then the community may not have an interest in the business at the date of divorce.” The valuation expert opined that the compensation the husband received was “at least reasonable.” Therefore, the marital estate would have no community interest.

The Pereira method generally applies when business profits are the result of the spouse’s efforts. Under this method, “the value of the business at the date of marriage is allowed a reasonable rate of return/appreciation through the date of divorce. The excess, if any, of the business value at the date of divorce over the separate property value represents the potential value of the community interest.” Using this method, the community property interest value came to $510,000.

The district court ultimately decided that the husband’s company “would not have succeeded without [his] labor, skill and business relationship.” The husband appealed, but the appellate court affirmed, noting that there was “ample evidence in the record that support the district court’s decision to adopt Pereira. The district court did not abuse its discretion.”

The case is Mamone v. Mamone, 2023 Nev. App. Unpub. LEXIS 207; 2023 WL 3579949, and a case analysis and full court opinion are on the BVLaw platform.

Survey reveals extent of staff shortages at BV firms

It’s not a surprise that the BV profession is suffering from staff shortages, but now we can quantify this phenomenon to some degree. Just a little over half (52%) of BV firms say they are experiencing staff shortages, according to preliminary results of BVR’s Benchmarking Survey. Over a third (38%) of respondents say they are short senior-level appraiser staff, and 20% are short junior-level staff. Very few say they are short administrative and clerical staff.

The survey is collecting much more information on staffing as well as data on operations, financial metrics, compensation, billing practices, marketing, tools and resources used, and more.

Deadline extended: Over 160 business valuation firms and practices have responded to the BVR Benchmarking Survey so far—but, of course, more is better. So BVR has extended the deadline to participate in the survey until July 31. The direct link to it is bvresources.com/2023bvsurvey. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Our thanks to those who have already participated—and to those who will take advantage of the extended deadline.

Replays available of free webinar series from the IVSC and Kroll

Recordings are now available of the Kroll-sponsored series of webinars presented by the International Valuation Standards Council (IVSC) from June 7 through June 15. The 2023 Valuation Webinar Series presents four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more. To access the recordings, click here.

What’s in the August issue of Business Valuation Update

Here’s what you’ll see:

·     “BV Firm Billing Rates Shot Up in 2022” (BVR Editor). The vast majority (83%) of business valuation firms increased their billing rates in 2022, according to preliminary results of BVR’s benchmarking survey. This is a much greater percentage than the last survey (2018) found, when 60% of respondents said they raised rates. Increases in 2022 ranged from 3% to 25%, with an average of 11%.

·   “Valuation Implications of the Changing ESOP Litigation Landscape” (BVR Editor). The tide has started to turn with respect to litigation over ESOP valuations, speakers reported at the recent ASA ESOP Virtual Conference. There has been a major court victory and pressure from the ESOP and valuation profession, and now the DOL has committed to moving forward—hopefully— with long-awaited regulations on the valuation of company shares to be bought by an ESOP.

·  “ASA Looks ‘Beyond’ Valuation to How to Build an Appraisal Career” (BVR Editor). A first-of-its-kind event in the valuation profession was the 2023 Beyond Valuation—Professional Development and Growth Conference hosted by the American Society of Appraisers (ASA) and sponsored by Empire Valuation Consultants. It focused on appraisal career development for those professionals who are just beyond the initial stages of their careers.

·  “Specialization Is the Key to Appraisal Career Success” (BVR Editor). A recurring theme throughout the 2023 Beyond Valuation—Professional Development and Growth Conference was the advice to specialize. Here is a basic plan to follow to achieve specialization.

·       “Takeaways From ASA’s ESOP Virtual Conference” (BVR Editor). ESOP valuation basics, sell-side transactions, issues with mature ESOPs, and common critiques with valuations in litigation were the topics of discussion at the ASA ESOP Virtual Conference.

·   “Canada vs. U.S. Valuations: CBV Institute Conference Reveals Some Nuances” (BVR Editor). At the CBV Connect 2023 annual conference of the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, it was interesting to note some of the differences between the standards and practices of valuations in Canada and the U.S.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

·   BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the August 2023 issue of Business Valuation Update.

Value-based billing gains steam at BV firms

Value-based billing is becoming more prevalent at business valuation firms, according to preliminary results of BVR’s Benchmarking Survey. Fifty-seven percent of respondents use this method to some degree versus 35% of respondents who used it in the 2018 survey. Some respondents (13%) reported using value-based billing as their primary method. Other firms bill using either fixed-fee or hourly billing as their primary method.

The survey is collecting much more information on billing practices as well as data on operations, financial metrics, compensation, staffing, marketing, tools and resources used, and more.

Deadline extended: Over 150 business valuation firms and practices have responded to the BVR Benchmarking Survey so far—but, of course, more is better. So BVR has extended the deadline to participate in the survey to July 31. The direct link to it is bvresources.com/2023bvsurvey. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Our thanks to those who have already participated—and to those who will take advantage of the extended deadline.

‘Fawning terms’ help sink valuation

In an Iowa divorce case, the appellate court affirmed the trial court’s decision to reject the valuation of the husband’s expert for one of his three businesses. The court questioned the expert’s reliability given the phrasing used in the valuation report, which the court described as “fawning terms,” when describing the subject businesses. The court also pointed out that the expert used two valuation methodologies without explaining why one was more reliable than the other. The court accepted the valuation the wife’s expert did, which was much higher.

Other valuation matters in the case include the treatment of intercompany loans and whether a business started prior to marriage should be included in the marital estate. The case is In re Marriage of Marasco, 2023 Iowa App. LEXIS 472; 2023 WL 3862591, and a case analysis and full court opinion are on the BVLaw platform.

Private-company EBITDA multiples down again in 1Q2023

After a rebound in the third quarter of 2022, EBITDA multiples continue to drop. From a median of 3.8x in the third quarter of 2022, the median selling price/EBITDA dropped to 3.5x in the fourth quarter of 2022 and then to 3.0x in first quarter of 2023 (see graph below). This is 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.

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.

Tips on portfolio valuation policies from inaugural AICPA forum

BVWire attended the AICPA’s late afternoon forum on portfolio valuations on June 28, hosted by KPMG in its offices in New York City (it was also virtual). This was the first in what will be a recurring event on this topic.

In responding to a question from the audience, the panel gave some advice on written policies for portfolio valuations. The SEC will look at the policy, so make sure it aligns with what is being done. Also, the policy should be as asset-class agnostic as possible and as broad as possible. A policy that is too specific will be easy to deviate from and will have to be frequently revised.

Sumeet Bhatnagar of KPMG acted as moderator of the panel, which included Garrett Pittenger (Apollo Global Management), Michael Weinberg (First Republic Bank/Columbia Business School), Augie Wilkinson (Bessemer Venture Partners), Jennifer Young (BDT & MSD Partners), and Douglas Burrill (PIMCO).

Global BV News

New IVSC Perspective Paper on technology

“Deciphering Technology” is the title of a new paper in a series of Perspective Papers from the IVSC. Written by Nicolas Konialidis, IVSC Asia Director, the paper gives a high-level view of technology valuation. The paper defines technology as it pertains to valuation, discusses Apple’s launch of the iPhone to contrast firm value and value of technology, and addresses other topics. This is the fourth paper in the current series. To download it, click here.

Solid advice on BV career development

A common thread that wove its way through last week’s ASA conference on appraisal career development was the advice to specialize. Speakers in all of the sessions at the 2023 Beyond Valuation—Professional Development and Growth Conference urged attendees to specialize in some area of appraisal—whether it be an industry, type, or purpose of a valuation. The June 8 event was hosted by the American Society of Appraisers (ASA) and sponsored by Empire Valuation Consultants.

Natural progression: As a profession grows larger and more complex, practitioners move toward specialization to survive and grow. Good examples are the law, medical, and technology professions. While the BV profession has recognized the trend to specialize, it appears that many valuers are still in the generalist category. During a 2021 BVR webinar, the audience was asked: Do you specialize within a particular industry? Three-quarters of respondents said that they are generalists and have little or no industry specialization. Unless there has been some seismic shift, the profession still has a good share of generalists.

The conference covered many more of the soft skills young valuation professionals need to take their careers to the next level. Of course, managers also need to be aware of these skills to develop their staff. Full coverage of the event—including advice on how to specialize—will be in the July issue of Business Valuation Update.

Hitchner comments on new Pepperdine report

The 2023 Private Capital Markets Report has a “plethora of good information,” says Jim Hitchner (Financial Valuation Advisors) in the May issue of Hardball With Hitchner. The report, from Pepperdine University, is the latest edition based on an annual survey of expected rates of return with respect to private companies. Respondents include lenders, private equity, venture capital firms, private-company owners, business brokers, business appraisers, and more. According to very early results in BVR’s Benchmarking Survey, 27% of respondents say they use the report for estimating small private-company cost of capital.

His caveat:While Hitchner goes into detail about the “positive pointers” of the report, he cautions users that some of the sample sizes are small and the sizes of the businesses also tend to be small. He advises analysts not to use the report as their sole valuation method.

Last year, the project needed to charge a fee for the report, but this year it is free (thanks to a new sponsor). To get a copy of the current and all prior reports, click here.

Faulty information slices personal goodwill in two

In a Utah divorce case, both the joint valuation expert and the expert the husband engaged agreed to the amount of personal goodwill in the husband’s consulting business. In Utah, personal goodwill is not subject to distribution in divorce.

Bad data:The estimate was based on an understanding of how the company acquired contracts. But, at trial, it was determined that the husband provided faulty information about this, and the court reduced the amount of personal goodwill by half. The husband appealed, but the appellate court affirmed.

There were other valuation issues, including the choice of valuation date and built-in capital gains taxes. The case is Rothwell v. Rothwell, 2023 UT App 50; 2023 Utah App. LEXIS 51; 2023 WL 3360879, and a case analysis and full court opinion are on the BVLaw platform.

New AICPA event on portfolio valuations

On June 28, the AICPA will debut the first in what will be a recurring event: the Portfolio Valuation Forum. This will be an in-person event (at KPMG in New York City) and via Zoom from 4:30 p.m. to 6:15 p.m. EDT. This is designed as an educational and networking event that brings together industry experts and participants in an interactive forum where participants can have real-time discussions on portfolio valuation-related topics, trends, and issues. Confirmed presenters include:

• Garrett Pittenger, Apollo Global Management Inc.;

• Michael Oliver Weinberg, First Republic Bank/Columbia Business School;

• Augie Wilkinson, Bessemer Venture Partners; and

• Jennifer Young, BDT & MSD Partners.

The moderator will be Sumeet Bhatnagar of KPMG.

BVWire will be there—will you? For details and to register, click here.

Deadline looms for BVR’s benchmarking effort

June 30 is the deadline to participate in BVR’s 15-year effort to help understand what makes a good BV practice a great one. If you have not already done so, please take the BVR Benchmarking Survey that collects data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more. The direct link to the survey is bvresources.com/2023bvsurvey. Our thanks to those of you who have already participated!

Global BV News

Calculation reports are very popular in Canada

BVWire attended last week’s CBV Connect conference, and one session discussed the three levels of valuation reports Canadian valuation standards identified: comprehensive, estimate, and calculation. The calculation report is the lowest level and is based on minimal review and analysis and little or no corroboration of information given by management. According to practice inspection declarations for 2022, more calculation reports were issued from 2018 to 2021 than the other types. There were 633 calculation reports issued and 547 estimate valuation reports (the midlevel report)—only 158 comprehensive valuation reports were issued in that time frame. What’s more, more than half (60%) of conference attendees said they would most likely not use a comprehensive report for litigation purposes. Full coverage of the conference will be in the August issue of Business Valuation Update.

Free webinar series from the IVSC and Kroll continues through June 15

Kroll is sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC), and the last one will be tomorrow, June 15 (past recordings available). The 2023 Valuation Webinar Series consists of four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more.

Why are valuers changing their Excel models?

In a world of economic turmoil and market volatility, valuation experts say they are spending a lot more time on business valuations. What’s more, they have had to retool their Excel models.

Here’s why:Valuers report that they are finding that costs are not moving with revenue as they did in the past. Inflation is having an uneven impact, so it is now necessary to dig down into the expense line items. As a result, they are seeing more adjustments to more line items in forecasts. Where before you would see a few adjustments, now there can be 10 or more. Excel models are being changed so that expense lines can be projected separately—instead of simply tying them to a ratio.

This was revealed during the Global Town Hall: State of the Global Markets and Their Effect on Business Valuation on May 16, an event that was a collaboration of various valuation professional organizations (VPOs).

Valuation experts also report other phenomena amid today’s turbulent environment. A recap of the event will be in the July issue of Business Valuation Update.

Husband vs. valuation expert, court splits the difference

In an Iowa divorce case, the wife engaged a CPA and valuation analyst to value the husband’s construction company, and he concluded a value of $1,020,597. The husband did not engage an expert, and his do-it-yourself valuation came in at $480,000. The court, not surprisingly, found the wife’s expert more persuasive—but still adjusted the valuation down to $800,000 based on “outstanding receivables and [the company’s] uneven history of success.” The husband appealed, but the appellate court affirmed the $800,000 valuation. There were other issues in the case, including the choice of valuation date and incomplete information.

The case is In re Marriage of Bainbridge, 2023 Iowa App. LEXIS 310; 2023 WL 2908648, and a case analysis and full court opinion are on the BVLaw platform.

First-ever conference on soft skills for valuers June 8

This past fall, BVR and the BV recruiting firm Borrowman Baker conducted a survey of American Society of Appraisers (ASA) members under the age of 40 whose primary discipline is business valuation. The results revealed some of the obstacles they see as hindering their career development. We are happy to see that the ASA has put together a half-day conference to help young professionals overcome these obstacles by developing the soft skills needed to take their careers to the next level. The event, 2023 Beyond Valuation—Professional Development and Growth Conference, was put together with the collaboration of Empire Valuation Consultants. Empire’s Bill Johnston is the conference chair. This is a virtual event that starts at 1:00 p.m. EDT on June 8 (recordings will be made available post-event). The agenda has some great topics and speakers. For more details and to register, click here (up to 4.8 hours of ASA CE and CPE credit are offered).

CMS talks Stark FMV June 27

In a rare chance to hear directly from a regulator, a Centers for Medicare & Medicaid Services (CMS) official will discuss the new definitions of fair market value (FMV) under the updated regulations for the Stark Law (the federal physician self-referral law) on a free June 27 podcast. To register, click here. The official, Lisa Ohrin Wilson, senior technical advisor, CMS, will be joined on the podcast by Alex Krouse, associate general counsel, Parkview Health, and healthcare valuation expert Tim Smith (TS Healthcare Consulting). Smith is the author/editor of The Complete Guide to Fair Market Value Under the Stark Regulations. The American Association of Provider Compensation Professionals (AAPCP) is producing the podcast. The updated regs represent a game-changer in determining FMV of physician compensation—don’t miss this podcast!

First recipient of the Kolodny Award

The National Family Law Trial Institute in Houston is an organization devoted to training family lawyers for trial. The students range from fledging lawyers to seasoned professionals. A faculty that includes top family law litigators, jurists, forensic, and business valuation experts from across the country does the training. A co-founder of the Institute was attorney Stephen Kolodny, who passed away in 2020. The Institute has initiated the annual Kolodny Award, to be given to an individual for unparalleled dedication and commitment to improving the trial skills of family law attorneys. The first Kolodny Award has been bestowed upon veteran valuation expert Jay E. Fishman, managing director at Financial Research Associates. Fishman has been on the Institute’s faculty for 32 years. “The award is special to me as Stephen Kolodny was the moving force behind the Institute,” Fishman tells BVWire. “To me, he was a mentor and a friend. I am humbled to have been chosen for such an award.”

For more information on the Institute, click here.

New edition of cannabis valuation book now in BVResearch Pro

The second edition of The Cannabis Industry Accounting and Appraisal Guide is now available to subscribers of the BVResearch Pro platform. The book provides useful information for appraisers and accountants about the unique financial aspects and intricacies related to businesses operating in this area. A notable highlight of the book is a sample risk assessment framework and appraisal report tailored to the unique demands of the cannabis industry. The book’s authors are Ron Seigneur, Stacey Udell, and Brenda Clarke, and there are a number of contributors. If you are not a subscriber to BVResearch Pro, you can purchase the book if you click here.

Global BV News

IVSC’s Darling talks about IVS update

Everyone interested in valuation should take the opportunity to participate in shaping the future of International Valuation Standards to ensure that they continue to reflect best practices globally, says IVSC Chair Alistair Darling in an article. These standards, developed through international cooperation, affect a broad spectrum of financial activities, from financial reporting and corporate finance to investment analysis and public policy decisions. Darling extends a “warm invitation” to contribute your voice to the process by offering feedback on the latest exposure draft outlining proposed updates to the IVS. To download the draft, click here. The public comment period will end July 28. 

Notable takeaways from the NYSSCPA BV conference

BVWire attended last week’s annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference, and—as usual—some very interesting and useful information was presented. Here is some of what we heard:

• Rule-makers have started to think about the value of internally generated intangibles on company balance sheets;
• Unless valuers can substantiate distinct impacts of ESG on cash flow, risk, or growth, they’re just “blowing smoke”;
• Fair value standard-setters did such a good job with the Mandatory Performance Framework, the CEIV credential became unnecessary (the credential will be discontinued);
• New York continues to be out of step with most other jurisdictions regarding DLOMs in statutory fair value cases;
• “Litigation funding” has emerged to bring more cases to trial that would otherwise be too expensive to pursue;
• Seized crypto assets are now being disposed of via exchanges versus auctions to maximize value;
• A large forensics practice uses QLUE to investigate and trace the use of nonfungible tokens;
•  ESG fraud could be a new practice opportunity for accountants and valuation experts;
• PE funds are eyeing more smaller targets than ever before;
• For matrimonial cases in New York, the valuation date can be very hard to pin down—there is no clear precedent; and
• ESG human capital disclosures are increasing, but investors want more quantitative measures, such as “regretted attrition.”

More detailed coverage of the conference will be in the July issue of Business Valuation Update.

Important podcast: CMS talks Stark FMV

BVWire has learned that a CMS official will discuss the new definitions of fair market value under the updated regulations for the Stark Law (the federal physician self-referral law) on an upcoming podcast. The official, Lisa Ohrin Wilson, senior technical advisor, Centers for Medicare & Medicaid Services, will be joined on the podcast by Alex Krouse, associate general counsel, Parkview Health, and healthcare valuation expert Tim Smith (TS Healthcare Consulting). Smith is the author/editor of The Complete Guide to Fair Market Value Under the Stark Regulations. The American Association of Provider Compensation Professionals (AAPCP) is producing the podcast The updated regs represent a game changer in determining FMV of physician compensation, and this is a rare chance to hear directly from the regulator—don’t miss it! Stay tuned for the broadcast date and registration link.

Attorney gets Daubert challenge over ESOP employment agreements

In a federal court in Georgia, an employee benefits lawyer prepared a report and was deposed regarding the process by which employment agreements were negotiated as part of a transaction involving an ESOP. The lawyer concluded that the process “was not consistent with the standards expected of a fiduciary in conducting such process.” The defendants filed a motion to exclude the lawyer’s testimony and report, arguing that he had no formal ESOP training, had given tax advice, and had not written any publications on executive compensation or valuation. But the court denied the motion, finding that the expert was qualified to issue his opinions and to testify. Among other comments the court made, it noted that the expert need not be the most qualified authority on a subject to be admitted.

The case is Gamache v. Hogue, 2023 U.S. Dist. LEXIS 54492; 2023 WL 2658033, and a case analysis and full court opinion are on the BVLaw platform.

A small thing can ruin a job interview big time

Competition for BV talent is fierce, so the last thing you want to do is let a good candidate get away—and the slightest thing could do it. In his latest newsletter, John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, points out a matter that may seem small but could make a big difference. If you bring in a candidate for an interview or a series of meet-and-greets, make sure you are there to bid him or her goodbye when he or she leaves. Sometimes, the end of the process can get awkward, and, if you’re not there to bookend the visit, the candidate could leave with a bad impression. If you can’t be there, Borrowman offers some tips on how to handle that. It’s almost certain that candidates are interviewing elsewhere, and, if “that employer handled this detail when you didn’t, you could lose,” he says.

Help us help the BV profession

Every business valuation firm or practice should want to know how to improve its operations, processes, and output. That’s why you should join BVR’s 15-year effort to help understand what makes a good BV practice a great one. The BVR Benchmarking Survey collects data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more. The survey is open until June 30, and the direct link is bvresources.com/2023bvsurvey. We thank those of you who have already participated!

BVWire continues on the BV conference circuit

June is busting out with two events that BVWire is looking forward to attending. First up is the CBV Connect 2023 June 8-10 in Toronto, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter. Some of the topics of note include valuation in the metaverse, automated valuation models, the role of financial experts in ESG litigation, a “ladies of litigation” panel on damages, and much more. The event will be in-person and livestreamed. For details, click here.

Then we’ll be at the ASA’s ESOP Virtual Conference on June 20 sponsored by Empire Valuation Consultants. The agenda starts with ESOP basics then moves onto the sell-side process, addresses issues with mature ESOPs (redemption/releveraging), and finishes up with a session on litigation (“has the tide turned?”). For more details, click here.

Global BV News

Free webinar series from the IVSC and Kroll June 7-15

Kroll is sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC) from June 7 through June 15. The 2023 Valuation Webinar Series will present four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more.

Speakers include Alistair Darling, IVSC chair and former UK Chancellor of the Exchequer; Megan Greene, Kroll chief economist and Bank of England Monetary Policy Committee (MPC) member; Mary Barth, professor of accounting, emerita at Stanford University; Marcelo Barbosa, former president of the Brazilian SEC; Doug McPhee, senior director and head of valuations for the Saudi Public Investment Fund; Louis Kujis, chief Asia economist, S&P Global Ratings; and Carla Nunes, MD, Office of Professional Practice, Kroll. For details and to register, click here.

Reasonable comp at center of dental practice dispute

In a Massachusetts divorce case, the wife argued that the normalization adjustments to her salary from her dental practice were based on unreliable data. The husband’s valuation expert used data from Salary.com and Indeed.com and adjusted her salary downward for the three past years he used for the valuation (the capitalized cash flow method). The court did not find those sources to be totally unreliable and accepted the adjustments for two of the three years in the analysis. However, the adjustment for the most recent year was rejected because the data did not delineate between a regular dentist and a prosthodontist, which became relevant to the practice during that year. Also, the wife did not offer the opinion of a qualified business valuation expert.

The wife appealed, but the appellate court affirmed the lower court’s decision. It also affirmed a 21% goodwill discount the husband’s valuation expert applied, reflecting the estimated loss of clients that would occur if the wife left the practice.

The case is Kwak v. Bosarth, 2023 Mass. App. Unpub. LEXIS 179; 102 Mass. App. Ct. 1116; 2023 WL 2817904, and a case analysis and full court opinion are on the BVLaw platform.

Big Four eye return-to-office mandate

Last week, we gave you some takeaways from the ASA Fair Value Spring Conference in New York City. During a panel of Big Four leaders, a question was asked that had nothing to do with fair value but was an interesting one: Will you require employees to come into the office? The panel members all noted that they were considering a mandate of two to three days in the office. And they remarked that, to make that work, managers would have to do the same to set the example. Also, they are considering some type of in-office activities that would give a reason for staffers to come in.

Recent study: Myron Marcinkowski (Kroll), who acted as moderator for the panel, mentioned an interesting recent study, “The Power of Proximity,” which reveals some of the potential pitfalls of remote work, especially for young professionals, women, and people of color. The study found that these groups are missing out on crucial feedback from their managers and colleagues—and they are more likely to quit. Remote work has not been able to replicate the in-office experience in this regard, which we would imagine is even more crucial for recent hires going through training.

The panel members included Josh Putnam (Ernst & Young), Manish Choudhary (Deloitte), Martin Mazin (KPMG), and Adam Smith (PricewaterhouseCoopers).

A more detailed recap of the conference is in the June issue of Business Valuation Update.

Reminder: BVR Benchmarking Survey is now live

We’re happy to see a good response so far from BVR’s latest version of its benchmarking survey, which will allow BV practices to see how they stack up against their peers. If you have not taken the survey, the direct link is bvresources.com/2023bvsurvey. The deadline for participating is June 30. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks. The survey collects the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more.

2022 Thomas Burrage Award recipient named

The late Thomas Burrage was highly respected for his expertise in litigation, forensic accounting, business valuation, and taxation, but he is remembered most as a kind and generous man who gave back to the profession. In that spirit, the 2022 Burrage Award for compassion, collegiality, and character has been bestowed upon Ron Seigneur (Seigneur Gustafson LLP), a veteran practitioner who has given back to the profession through his volunteering on committees, writing books and articles, speaking at conferences, and much more. The award was given by the Expert Resource Connection, co-founded by Burrage, which is a group of business valuation and forensic accounting professionals who share resources and collaborate on engagements.

As part of the award, a scholarship of $2,000 has been presented to an accounting student at the University of New Mexico (UNM). Burrage was also known for giving his support and guidance to young people in the profession, and UNM was his alma mater. If anyone is interested in making a tax-deductible donation to the Burrage Scholarship Fund, please send a check payable to:

The Thomas F. Burrage Scholarship Fund

Attn: Pam Marion, Seigneur Gustafson LLP

940 Wadsworth Blvd., Suite 200

Lakewood, CO 80214

NACVA to publish a new BV book

The National Association of Certified Valuators and Analysts (NACVA) will publish Business Valuation: Practitioner’s Guide to Valuing Privately Held Businesses later this year through Wiley. The book has an impressive list of co-authors who are also NACVA faculty, instructors, board members, and advisors (the list is included in the COO’s 1Q23 report, which is available here).

Global BV News

Valuing breweries in Canada

In a video,Spencer Gunning, CBV, with Big Rock Brewery in Canada, talks about the latest trends and insights in the brewery industry with Catalina Miranda of the CBV Institute. Gunning also wrote an article on the topic, the latest in a series of “CBV Insights,” which you can read if you click here. Valuers in this sector need to assess how the subject brewery is adapting to recent trends, including a “growing demand for craft beverages, a significant shift in market share towards ready-to-drink (RTD) and low-alcohol and non-alcoholic options, and an increased focus on sustainable brewing and packaging practices,” Gunning writes.

Reminder: Comments due on 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. 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 the 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.

What’s in the June issue of Business Valuation Update

Here’s what you’ll see:

• “Damages Guide Editors Offer Insights and Advice to Valuers” (BVR Editor). Business Valuation Update had the pleasure of sitting down with the editors of the recently published 7th edition of BVR’s Comprehensive Guide to Economic Damages. They gave some insights into recent developments and some advice for experts who practice—or are thinking of practicing—in this area.

• “BVR to Identify Top-Performing BV Firms and Practices” (BVR Editor). Since 2007, Business Valuation Resources 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 launching the latest version of this survey—with a new twist.

• “Takeaways From the Record-Breaking ASA New York Fair Value Conference” (BVR Editor). In-person capacity was sold out, and virtual attendance brought the total to about 300—a new attendance record—for the ASA Spring Fair Value Conference in New York City May 4. Topics included inflation impacts on valuation, audit targets, the new AICPA business combinations guide, ESG, PE valuations, and more.

• “Damodaran Continues His Explosive Remarks About ESG” (BVR Editor). At the ASA Spring Fair Value Conference in New York City on May 4, we did not expect to hear any glowing words about the environmental, social, and governance (ESG) movement from Professor Aswath Damodaran (New York University Stern School of Business). In his blog, he has been very vocal in his strong criticisms of ESG as a “weapon of mass distraction” and a “gravy train” for consultants, investment managers, scoring/ratings providers, and those pushing for more disclosures.

• “New Valuation Credential Set to Launch for Healthcare Compensation Experts” (BVR Editor). The American Association of Provider Compensation Professionals (AAPCP) is set to unveil the Certified in Provider Compensation Valuation (CPCV) credential this summer. The news was announced at the AAPCP’s annual conference in Nashville April 26-28. A number of valuation professionals have already signed up for the training courses.

• “Valuers Run the Risk of Mismatching Inflation Assumptions” (BVR Editor). During a presentation in the United Kingdom, Nick Forrest (UK Economics Leader for PwC) made some observations that should resonate with business valuers worldwide. In the UK, the Bank of England established its target inflation rate of 2%, but inflation varies hugely from this target, even during noninflationary periods, depending on which factor an analyst uses.

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 with one case featured in a detailed analysis.

To stay current on business valuation, check out the June 2023 issue of Business Valuation Update.

Latest BVR benchmarking survey is now live

Hundreds of business valuation practices and firms have participated in BVR’s ongoing benchmarking survey since it was first launched in 2007. The survey collects the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more. Valuation experts use it to see how they and their firms compare with their counterparts and to pick up some ideas on how to improve their practices.

Survey link:The 2023 version of the survey is now live, and a direct link to it is surveymonkey.com/r/RVYDLRB. The deadline for participating is June 30. The length of the survey has been reduced, so it will not take as much time as previous versions.

All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

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.

Thank you in advance for participating!

Fair value credential to be sunset, conference speakers say

The news that the Certified in Entity and Intangible Valuations (CEIV) credential was being discontinued stunned some attendees at the ASA Fair Value Spring Conference in New York City on May 4. The CEIV credential was a joint effort of the AICPA, ASA, and RICS that began in 2014 and was launched in 2017.

Valuation practices, including the Big Four, embraced the program, and many practitioners went through the training, but some firms stopped short of requiring their people to be credentialed. During the credential’s development, there were concerns over such issues as quality control and client confidentiality, BVWire reported at the time.

MPF will endure.At the conference, speakers reported that the Mandatory Performance Framework (MPF) will continue to be used. In fact, a revision is in the works to make it more streamlined and some credentialing groups will incorporate it into certification training. The MPF was designed to make sure that the valuation expert adequately documents his or her work and thought processes. Better documentation helps make auditors more comfortable with valuation estimates, especially for intangibles, and it eases the concerns of the SEC and PCAOB.

At this point, the credentialing organizations are working through details of the sunsetting process, and more information will be forthcoming.

More news from the ASA Fair Value Conference

In addition to the news that the CEIV credential was being discontinued (see previous item in this issue), here are some other takeaways from the ASA Fair Value Spring Conference in New York City on May 4:

• The current economic picture is seen as transitory, and there have been no major changes to long-term growth rates being used (a range of 2% to 2.5% was mentioned);
• The Big Four are eyeing AI (“you can’t fight machines”), and they are learning how to harness it—they don’t see its use in business valuation rising to the level that it has with real estate appraisals;
• Aswath Damodaran (New York University Stern School of Business) continued his strong criticism of the environmental, social, and governance (ESG) movement;
• For fund valuations, experts are focusing more on the annual operating plan, taking a more forward-looking approach;
• Fair value concepts do not pay enough attention to the legal boundaries of protection with respect to technology and intellectual property assets, which have a “huge” impact on value; and
• A final version of the AICPA’s business combinations guide is expected to be issued in Spring 2024.

A more detailed recap of the conference will be in the June issue of Business Valuation Update.

Financial expert guide added to BVResearch Pro

The Financial Expert Guide for Family Law Judges and Attorneys, National Edition, is now on your digital bookshelf if you are a subscriber to the BVResearch Pro platform. The book, written by attorney John Tatlock and valuation experts Kevin Yeanoplos and Ron Seigneur, shows judges and attorneys the fundamental building blocks of the valuation analysis for a business. It begins with the discussion of the essential standards and premises of value that must apply in every valuation engagement, followed by the analysis of the business owners’ reasonable compensation and the specific recognized approaches and methods for conducting and reporting the results of a valuation analysis. There is also a full-blown Conclusion of Value report judges and attorneys should expect to see from experts.

If you are not a BVResearch Pro subscriber, you can purchase the book if you click here.

New BV workflow tool makes PDF tax document conversion a breeze—free webinar!

When we talk with practitioners about their engagement workflows, the laborious process of converting client tax documents from PDF to Excel regularly tops the list of steps that take far too much time—and usually requires manual data entry. The new TaxXL tool—now offered by BVR—is a welcome game changer! Developed for business valuation professionals by Nambri, TaxXL converts PDF tax forms to Excel spreadsheets quickly and accurately.

The BVR team was duly impressed—you can see it in action during a free webinar on Tuesday, May 16, at 1 p.m. EST. Register for the free webinar here, and learn more about TaxXL here.

Next stops on the BV conference circuit

Global BV News

New study of inflation and valuation in German firms raises concerns

A new paper finds that company-specific inflation rates assumed for the steady state are lower than the expected general inflation rates. This should not be the case regularly or on average, respectively, the authors argue. They examined 263 valuation reports for Germany-listed firms with a valuation date between 2000 and 2021, mostly for the purpose of determining the price per share to compensate minority shareholders during a squeeze-out. The results of the analysis are from a time when expected inflation was much lower than recently. “Inflation-induced value effects will increase, if a company’s specific inflation rate is not adjusted to higher expectations about future inflation,” the authors write. They also point out that a company-specific inflation rate can fluctuate based on differing inflation expectations in the markets in which the company is operating. “This challenges the usual assumption that the company specific inflation rate is constant, thereby also challenging the use of the perpetuity formula after a detailed cash flow forecast for a few years.”

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.