| April 3, 2013 | Issue #127-1 |
IRS loses appeal in tax-preparer case; vows to continue oversight In a terse, one-page letter ruling last week, the D.C. Circuit Court of Appeals denied the Internal Revenue Service’s renewed request to stay the lower court’s injunction of its efforts to license independent tax preparers in Loving v. IRS. The IRS failed to satisfy “the stringent requirements for a stay pending appeal” was the court’s only discussion of its denial. The IRS’s “Return Preparer Initiative” is an effort to regulate independent tax preparers such as non-CPAs, attorneys, IRS enrolled agents, and otherwise “supervised” preparers by requiring them to pass a competency test, receive continuing education, and pay annual fees. Even before this latest loss, IRS chief counsel William Wilkins admitted the initiative’s multiyear, staged rollout had “stalled” in the courts; yet he said the agency would continue—with the assistance of the Justice Department—“to contest the notion that the program lacks statutory authority.” One point deserves emphasis, Wilkins added, in recent remarks to the Tax Executives Institute:
Effect of current stock market surge on the ‘big four’ valuation variables—cash, growth, ERP, and risk-free rate As usual, Prof. Aswath Damodaran (NYU Stern School of Business) is among the first to assess how the recent surge in the stock market impacts valuation. Right now, with both the Dow and S&P 500 hitting record highs, “the natural impulse is to look for signs of overvaluation,” he writes in the most current Musings on Markets,“but there are good reasons why U.S. stock prices are elevated: cash flows are high, growth looks good, the macro risks seem to have faded (at least somewhat), and the alternatives are delivering lousy returns.” On each of the four major variables of public company value, the U.S. equity market is also looking at "good" numbers right now, Damodaran says. “The cash returned to investors by U.S. companies has rebounded strongly from post-crisis lows, earnings growth is reasonable, the risk-free rate is at a historic low, and the equity risk premium, while not quite at pre-crisis levels, has declined significantly over the last year.” With regard to the ERP, in particular, Damodaran estimates a “historical” premium of 4.20% for U.S. stocks in 2013, based on 1928-2012 data. An implied approach yields 5.78% at the start of 2013, lower than the ERP at the start of last year, he says, “but still at the high end of the historical range.” In the near term, U.S. stocks remain vulnerable to two possibilities. One is that another macro crisis will pop up (Italy, Spain, Portugal, or a non-EU "black sheep"), which will cause ERPs to jump back to the 6%-plus levels that we have seen so often in the last five years. “The other is a sudden surge in interest rates, unaccompanied by better earnings or higher earnings growth,” he says, which will adversely affect all risky asset classes (corporate bonds, real estate, etc.) As a valuation advisor—and based on his current assumptions—Damodaran believes the current surge is “justified,” but as an investor, “I am going to stop worrying about the overall market and go back to finding undervalued companies.” New trends in new auto sales may affect blue sky multiples but not methodology for valuing dealerships In valuing auto dealerships, a common method is to look at pretax earnings for the total dealership and then adjust for the two key variables—compensation and rents—for any amounts that are either above or below market, according to Poonam Vaidya, who led the recent NACVA/CTI webinar New Developments & Trends in Dealership Valuation. “Then we apply a blue sky multiple,” she explained. Until recently, however, new vehicles have not been contributing much to an auto dealership’s overall operating profits. Do these circumstances change the methodology? “For example,” Vaidya said, “if we are valuing a Toyota dealership and [new sales] didn’t contribute a single dollar to the profits, should we apply some multiple to adjusted earnings before tax to develop blue sky?” Or should the blue sky multiple apply only to the new vehicle department’s adjusted pretax earnings? The answer: In most cases, BV appraisers should not have to change their valuation methodology to reflect new industry dynamics, Vaidya said. “We continue to apply our blue sky multiples to total profits,” particularly where the facts support doing so. For instance, in her example of the Toyota dealership, the parts and services department and used car departments continued to drive customer traffic—and profit—due to the franchisee’s continuing relationship with the manufacturer. In valuing distressed companies, DE Chancery warns against comparing ‘good’ apples to ‘bad’ After trying to integrate several businesses, with disastrous results, a private equity firm finally “quit” and sold off most of its senior debt. For two months, the purchaser tried but failed to secure a single bid for the company’s assets, and ended up selling them to an affiliate—at an open auction—for just under $92 million. Without having made a bid, the PE firm sued the debt purchaser and affiliate in the Delaware Court of Chancery, claiming the sale process and price was not “commercially reasonable” (under the UCC). To show the company was worth more than the $92 million paid at foreclosure, the PE firm's expert applied a DCF analysis as well as the guideline public company method, selecting three public comparables in the same industry but with stable, if not profitable, financials. After a rebuttal expert criticized his failure to use distressed companies as comparables—and accused him of overstating the EBITDA multiple for one company by 100%—the PE firm’s expert revised his report but didn’t change his overall conclusion that the company was worth $110 million at auction. That final value “makes no sense,” the Court of Chancery said. First, his market approach failed to compare the company to other distressed firms. Second, his DCF was based on “stale, unrealistic” projections, formulated during the turnaround phase. Finally—even when confronted with “glaring mistakes” in his report—the expert failed to revise his original opinion. Read the complete digest of Edgewater Growth Capital Partners LP v. H.I.G. Capital, Inc., 2013 Del. Ch. LEXIS 54 (Feb. 28, 2013) in the May Business Valuation Update; the court’s opinion will be posted soon at BVLaw. ABA primes young lawyers on the market approach “There are several critical steps in applying the market approach that will lead to unreliable results if they are not performed properly,” says the ABA in a new article specifically geared to new litigators: A Primer on the Market Approach to Business Valuation. To assess the use of “real transactions and stock prices,” a young lawyer should pay close attention to the expert’s:
Oh, it’s good to start them young. “It is critical that the approach and underlying assumptions in a damages claim are consistent with the facts and circumstances in the case,” the ABA advises its fledgling attorneys. “A market approach may be the most appropriate way to quantify damages; however, the opinion of the expert can be subject to exclusion under a Daubert challenge if not applied correctly and appropriately supported.” Good examples of BV experts getting good press We believe BV appraisers should be on the speed-dial list of every business reporter, their expertise the “center column” of financial pages, but recently we’ve seen articles on appraisal topics in places from The New York Times to Forbes to a daily business blog that have somehow omitted BV experts as go-to sources and authors—until now. In a new article for Crain’s Cleveland Business, “When a purchase involves both cash and stock, buyer and seller beware,” author and appraiser Sean Saari (Skoda Minotti) explains in plain and convincing language how the complex discount for lack of marketability should put both parties to a business sale on high alert. And in a dramatic tale that rivals King Lear in the dissolution of a family—and its multi-million-dollar citrus business—a Florida Trend article relies on “valuation expert” Don Wiggins (Business Valuation Inc.) to explain why the values in dissenting shareholder litigation can be so disparate—and so vital to the eventual outcome of the case. FMV DLOM Calculator has a new ‘filtering’ functionality—and a new, free companion guide We’ve just updated The FMV Restricted Stock Study and with it the FMV Opinions DLOM Calculator. In addition to using a detailed, multistep FMV methodology for determining a discount for lack of marketability—including inflation-adjusted historical financials—the calculator now offers the following features to filter your selected dataset even further:
The ‘price’ hasn’t changed. The calculator is still complimentary to subscribers of The FMV Restricted Stock Study. To learn more, call 503-291-7963, ext. 2, or email sales@bvresources.com. Also new: We’ve just updated the 2013 Companion Guide to The FMV Restricted Stock Study; download your copy here. FASB admits ‘strong desire for convergence’ with IASB—at least in accounting standard for credit losses Last week, the Financial Accounting Standards Board (FASB) decided to postpone the comment deadline for Proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15) until after the busy tax season, or until May 31, 2013. “The decision was made in response to stakeholder requests for more time to consider the FASB's proposals on credit losses as well as the related staff ‘Frequently Asked Questions’ document that was issued earlier this week,” says a FASB release. “Stakeholders also expressed a desire to consider the International Accounting Standards Board's (IASB) proposal on credit losses, which was issued for public comment on March 7, 2013.” The FASB’s model proposes a single “expected credit loss” measurement objective for recognizing losses, replacing the multiple impairment models that currently existed under U.S. GAAP, which generally require that a loss be “incurred” before it is recognized. The FASB proposal would require management to estimate any cash flows it does not expect to collect using “all available information, including historical experience and reasonable and supportable forecasts about the future.” "Given our strong desire for a converged standard, the FASB encourages stakeholders to also consider the proposal issued by the IASB, which differs in some respects, and to share your views on the appropriate path forward,” says FASB chair Leslie Seidman. PCAOB proposes to become more ‘logical’—at least in organizing its standards The Public Company Accounting Oversight Board is proposing to reorganize its existing auditing standards into a topical “framework” based on a “single integrated numbering system,” it said in an announcement. The board hopes the proposal will “present the standards in a logical order that generally follows the flow of the audit process” and allow users to “navigate [them] more easily.” The reorganizational framework creates no new performance obligation; it is just the first step in PCAOB efforts and additional projects to enhance the structure of its standards. Comments on the proposal are due by May 28, 2013. Long live the new editor! Since its inaugural issue in 2006, the BVWire has been privileged to enjoy several immensely capable editors at its helm—and starting next week, it welcomes Andy Dzamba as its new executive editor. (The current editor will be pursuing a writing life beyond BV—if there is such a thing!—but is immensely grateful for her many years getting to know and serve such an interesting, intelligent, and generous group of professionals.) With a long and strong background in finance, accounting, journalism, and reporting, Andy is supremely positioned to continue the BVWire’s mission to provide current, comprehensive, accurate, and actionable news and information for the broader community of business valuation professionals, financial analysts and attorneys, brokers and business owners and more. Please help us welcome Andy by saying hello and perhaps giving him your thoughts on BVWire’s current coverage. What particular area would you like to see receive more attention? What features would you like to see more of—including surveys of the profession, complimentary downloads, links to data and resources, etc.—and what new features might we add? Andy welcomes your feedback, at this or any time in the future. Please email him at andyd@bvresources.com.
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