Astleford has it all: Tax Court decides limited partnership discounts, REIT v. RELP data, and more
On Monday the Tax Court decided Astleford v. Commissioner (T.C. Memo 2008-128), a new gift tax case of particular interest to business appraisers in valuing family limited partnerships and “layered” real estate holding entities. “In order to calculate the fair market value of limited partnership interests [the] petitioner transferred as gifts,” the court begins, in a nice summary of the issues:
…we must determine the fair market value of 1,187 acres of Minnesota farmland, whether a particular interest in a general partnership should be valued as a partnership interest or as an assignee interest, and the lack of control and lack of marketability discounts that should apply to the limited and to the general partnership interests.
In deciding these issues, the Tax Court (J. Swift) renders a thoughtful opinion that considers expert testimony from both the taxpayer (four experts total) and the IRS (two experts). The court also considers the comparability data from sales of publicly traded REITs (real estate investment trusts) with data from sales of registered RELPs (real estate limited partnerships) and—while declining to declare one dataset superior to the other—it does examine which set of sales transaction data applies more to the facts and circumstances of the various Astleford family interests. But the true “pearls” contained in the decision, according to Ted Israel (Eckhoff Accountancy Corp.), are the Tax Court’s acceptance of a sizeable combined discount for lack of marketability and control for a 50% general partnership interest; and a fairly substantial discount for the “tiered” ownership interests inherent in the real estate limited partnership. Destined to be a landmark gift tax case, a complete abstract of Astleford will appear in the next (June 2008) Business Valuation Update™.
FSP 142-3 on determining useful life of intangibles
Last week the Financial Accounting Standards Board (FASB) released FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. The FSP amends the relevant factors to consider when developing renewal or extension assumptions in determining the useful life of a recognized intangible asset under FAS 142, Goodwill and Other Intangible Assets. According to the preamble, “the intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP).”
As expected, its key provision permits consideration of an entity’s historic experience with renewing the intangibles in question, adjusted for the entity-specific factors listed in FAS 142 (paragraph 11). If an entity lacks historical experience, “it shall consider the assumptions that market participants would use consistent with the highest and best use of the asset,” also adjusted for FAS 142 factors. In applying the income approach, “an entity shall consider the period of expected cash flows used to measure the fair value of the asset,” as adjusted. The FSP provides two illustrative examples—the first concerning a technology license and the second on customer relationships. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, with no early adoption. To access a complete copy of the FSP, click here.
FASB makes progress on hedging. In last week’s Board meeting, FASB members decided to propose amendments relating to two standards: FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and FAS 133, Accounting for Derivative Instruments and Hedging Activities. “The proposed amendments would be effective fiscal years ending on or after Nov. 15, 2008, the proposed FSP is expected to be issued by August,” says a new FEI posting, “and a question in the notice to recipients will address practicality of the effective date.” In another move, the Board decided not to pursue a project to define public versus nonpublic (private) entities.
Average hours spent on small company valuations
“How many hours, on average, do you spend on these engagements?” That was the question presenter Gary Trugman asked attendees of BVRs most recent teleconference, “Valuing the Very Small Company.” Registrants emailed their responses over the course of the 100-minute session, and their answers ranged from 12.5 hours (for a calculation of value) all the way up to 100 hours. But the average fell just around 50 hours, which didn’t surprise Trugman. “I was thinking that a range of 40 to 60 hours was typical,” he said.
Is it still safe to perform a calculation of value? More surprising was the amount of time the conference presenters spent answering 20+ questions on performing calculations of value (versus conclusions of value) when client funds are limited. Typical among these: “One way that I have been able to meet a client budget…is to call the engagement a ‘calculation,’” said one attendee. “I still do all the procedures necessary to feel comfortable in my value. However, since writing the report is frequently the most costly portion, I limit my reporting to the very basics. By calling it a calculation, I don’t have to show all work in my report. Is this a problem?”
In a word—yes, there are a myriad of problems that can plague the appraiser, not the least of which are the limitations that SSVS-1 (AICPA) imposes on the use of calculations. “A calculation is NOT a conclusion of value,” said panelist Stacey Collins. They might be appropriate in an initial consult with a long-time client who’s thinking of retiring or selling, perhaps; or where the appraiser is reviewing another’s work. But doing a valuation engagement with documented scope limitations doesn’t avoid all of the problems. The bottom-line, according to Ron Seigneur, is that most appraisers will not be able to justify a calculation (due to lack of client funds or other reasons) when they should have performed a complete conclusion of value in the first place, especially in a litigation setting. “Sometimes,” Trugman added, “you just have to walk away from those engagements.” We’ll have a complete write-up of the experts’ discussion and more in the next Business Valuation Update.
Billing rates, bonuses, and big revenue generators for BV
Do trust and estates still generate the largest revenues for most BV firms? Are BV practices still suffering from professional staffing shortages at the mid- and senior-levels? What about retaining experienced staff: Will most BV firms pay another 5% to 9.9% salary increase this year for all positions? Will average hourly billing rates increase from current levels— approximately $120 per hour for junior analysts, $175 for seniors, and $250 for partners?
BVResource’s 2008 Firm Economics & Best Practices Survey will answer all these questions and more. Still the single-most comprehensive study of the business valuation profession, this year’s data will provide current and comparable benchmarks for compensation (including bonus plans), practice specialization, financial performance (annual gross revenues and billings), firm marketing and technology, etc. Respondents will receive a free summary of the results and the final 2008 Survey at substantial discount ($150). To participate in this year’s study—which already promises to provide the biggest, best data yet—click here.
Over 450 new transactions in Pratt’s Stats
Pratt’s Stats® added over 450 NEW transactions to the database this past April—a record for the most transactions ever added during a single month. This substantial increase brings the total transaction count to over 11,500 sold private companies. In addition to collecting data on the acquisitions of private firms by public companies from the Securities and Exchange Commission (SEC) website, Pratt’s Stats visited three business brokerage firms during April to gather over 350 proprietary private-to-private transactions. To access the new transactions in Pratt’s Stats, click here.
To get the most out of the Pratt’s Stats database, we suggest The Comprehensive Guide to the Use and Application of the Transaction Databases, by Nancy Fannon and Heidi P. Walker. Released this month by BVResources, this new guide analyzes the Pratt’s Stats, BIZCOMPS®, FactSetMergerstat Deal Report and DoneDeals® databases, providing guidance on how to avoid common pitfalls associated with each. For more information, click here.
BVResearch now has more Insights than ever
We’ve just added 265 articles from Willamette Management Associates’ esteemed quarterly journal, Insights, to the BVResearch™ database, making this fully searchable, online database the most current, comprehensive, valuation-specific resource for business appraisers, financial analysts, attorneys, business owners, and more. Try it for yourself: An advanced search of BVResearch, limited to the Insights content, turns up over 100 articles related to intangible assets. (Go to the BVLibrary search page, click on “advanced search” and then “BVResearch” as the product to search; and then click off all but the Willamette Insights content and enter your search terms.) Likewise, there are numerous articles related to marketability discounts, intellectual property—and the firm’s specialty, ESOPs. For example, for a free copy of “Unique Factors Related to the Valuation of ESOP Stock,” by Malcolm Hartman, click here.
With these Insights into applied microeconomics, valuation analysis and financial theory—in addition to the hundreds of court case abstracts, valuation reports, teleconference presentations and “live” conference presentations—BVResearch has indeed become the premium tool to meet all BV appraisers’ and analysts’ research needs.
Mention ‘BVWire’ for discount to IBA Symposium
The 2008 IBA Symposium will once again march to the beat of a different conference drummer in Chicago, June 18 - 21. Instead of the “open call” of most professional group gatherings, the IBA offers two tracks, each limited to 100 registrants—“Masterminds” allows practitioners to dive into the finer nuances of technique and theory, and “Fine Tuning” is for those who are developing report templates, supervising staff, and acquiring skills in new areas, such as intangibles. Presentations are a half-day in length, allowing for more in-depth treatment of the issues and practice case studies. Seating is rotated so registrants confer with different groups during each session. Jim Hitchner will deliver this year’s keynote on “The Cost of Capital: Duff & Phelps v. Morningstar v. Common Sense.” Additional speakers include Rob Schlegel, Len Sliwoski and Ray Miles on the transaction databases; Ashok Abbott and James Lurie on "Apportioning Active and Passive Appreciation in Divorce;" Michele Miles on professional service agreements; and more. The full brochure is here. Early bird discounts end this Friday, May 9th, but the IBA will offer the lower price through next week if you mention BVWire. To register, call 800-299-4130 or visit www.go-iba.org.