BVWire Issue #152-3 | May 20, 2015


Inside the mind of the IRS re: reasonable compensation

Valuation analysts can now get a rare look at how the IRS examines reasonable compensation cases. The agency recently made public an internal document, “Reasonable Compensation: Job Aid for IRS Valuation Professionals,” which has a wealth of information to help valuators anticipate the challenges the IRS will make to reasonable compensation estimates. The job aid is available as a free download from BVR.

Treasure trove: The job aid, which includes a number of appendices, examines valuation approaches, compensation data sources, suggested reading material, and court cases that shape the IRS’s current thinking on this matter. It also discusses taxpayer arguments for levels of compensation that may appear to be unreasonable. For example, one argument for a high level of compensation is that an individual was underpaid in prior years. The job aid provides questions the IRS agent will ask when assessing that argument and also the relevant court cases on that specific issue. You’ll also find sample information document requests (IDRs), examples of the market and income approaches, and much more

In the job aid’s list of suggested readings, the first resource listed is the book Reasonable Compensation: Application and Analysis for Appraisal, Tax and Management Purposes, by Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson), which is published by BVR. The authors will be giving us their comments on the job aid in a future issue of Business Valuation Update (subscription required).

Michael Gregory (Michael Gregory Consulting) will conduct a webinar on August 4, and he will discuss the job aid and what it might mean for business valuers reviewing reasonable compensation issues while providing valuations for federal tax purposes.

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Goodwill is a function of jurisdiction, appraiser says

No two cases are alike, and different jurisdictions approach goodwill and noncompete agreements differently, cautions Jim Alerding (Alerding Consulting LLC), in response to last week’s BVWire item on the Mauceri Texas divorce case, in which Bob Dohmeyer (Dohmeyer Valuation Corp.) was the prevailing expert. Therefore, it would be a mistake to make too many assumptions based on the outcome of a particular case.

Divorce is a state law issue, which means appraisers must know the particulars of the jurisdiction in which they practice, Alerding says. He calls the courts’ views on personal goodwill “fragmented.” He agrees with Dohmeyer that in Mauceri the issue of a covenant not to compete (CNTC) made a complex situation even more complex. “Bob,” he says, “was able to convince the court that the salable personal goodwill should be a part of the marital estate.” That approach comports with the Wisconsin Supreme Court’s decision in McReath, which also included salable personal goodwill in the marital estate.

But Alerding says he knows of no other cases that focus directly on this matter. “So I am not comfortable saying that exclusion of salable personal goodwill is a ‘windfall,’ because, as I said, it is a matter of what the law in a given state is.”

He believes that Dohmeyer’s treatment of the issue may well gain traction with courts, clearing the way for experts to present it in jurisdictions that until now have not focused on it. At the same time, he believes it is important for the expert to educate the attorney about it, prior to going to court, and also to calculate a value that does not include salable personal goodwill in order not to leave the client without a viable alternative opinion.

Alerding also sounds a note of caution about another aspect of the Mauceri case, specifically the statement that the court “discredited the husband’s claim that he could just go across the street and open another agency. He would be competing against himself, which defied logic, the court found.”

It reminded Alerding of a bankruptcy case in which he testified about the value of an insurance agency that resembled the business in Mauceri. “I also included the salable personal goodwill in the agency’s value. The owner of the bankrupt agency had already told the court that he would simply go across the street and set up shop and take the business. It turns out that is exactly what he did and his creditors were unable to realize the value I had placed on the agency.”

Dohmeyer reply: Dohmeyer stands behind the “windfall” argument. “Valuation is about facts and sound economic reasoning,” he replies to Alerding. “I did not ‘convince the court that the salable personal goodwill should be a part of the marital estate.’ In Mauceri, I showed that discounting the stipulated FMV for lack of a noncompete amounted to a discount to the commercial—not personal—goodwill of the business. And the discount would be a windfall to the husband equal to exactly 50% of the difference between the FMV with and without a noncompete (assuming a 50-50 division of assets).”

He continues: “These economic facts, just like the weight of a sack of potatoes, are independent of state borders, laws, and case history. When the opposing expert was confronted with this reasoning, she conceded there would be a windfall and proposed the court allow the discount but then disproportionately divide the remaining marital assets to achieve, in a roundabout way, the hypothetical 50-50 division. Even though I appreciate Jim’s points, the other expert relied on the local folklore and consequently we can see here the importance of understanding the facts and economic substance behind the discount for lack of a noncompete before writing our reports and testifying.”

Dohmeyer and his co-author, Josh Angell, are currently working on an article for Business Valuation Update that discusses this topic at greater length. Stay tuned.

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Valuing a pain practice in healthcare

When valuing a pain practice, make sure you understand the nature of its business, says Vanita Spaulding (Cogent Valuation) in a recent article in the Ambulatory M&A Advisor. She says the valuation depends on whether the business is more an urgent care center where people come in one time or it is more a pain practice that operates on a more consistent patient base. Spaulding says that healthcare businesses such as pain practices are valued differently because they generally have developed more intangible assets than the average urgent care clinic.

Pain points: “A pain practice is different,” she says. “People come on a regular basis, sometimes even weekly. And any time you have patients returning on a regular basis, they develop a relationship with that business. A well-established group of patients, in valuation terms, is a customer relationship intangible asset, and is one of the factors in determining the value of the pain practice,” Spaulding says.

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Valuations in China have evolved with the economy

BVWire had the honor of meeting a number of valuation professionals from China at the 2015 International Valuation Forum in Atlanta, sponsored by the International Association of Consultants, Valuators and Analysts (IACVA). Madame Liu Ping (China Appraisal Society), vice chairman of IACVA, addressed the group, and Yonghua Ruan (China Enterprise Appraisal) gave a presentation on brand valuation.

Xiaohong Li (China Appraisal Associates) told the audience that most business valuations in China are done by very large firms. In the beginning, valuations were done using only the cost approach, but now all three methods are used. There are 30,000 valuation professionals in China, and different licenses are granted for valuing state-owned assets and public companies. Valuators play a big role in M&A of state-owned assets.

The Chinese economy has evolved into a “new normal,” according to Li, and now focuses on innovation and Internet-related technology. Companies have moved from heavy investments in fixed assets to intangible assets and technology. Therefore, valuation engagements have become more complicated. There is also a ministry for quality, known as the Quality Assessment Board, that seeks to put a value on brands, so consumers will be able to identify the quality difference between one brand and another.

Valuators personally on the hook in Russia

In Russia, business valuation professionals put up their own personal assets when doing a valuation. “If the valuation is wrong and it damages the client, we’re personally responsible,” reports Ekaterina Sinogeykina. She is CEO of NPJSC Euroexpert, a midsize valuation firm in Moscow. Her firm does business with financial institutions mostly, but also with individuals (valuing collateral for loans), and construction consulting for financial institutions. Their main valuation method is the income approach because of the lack of data relative to the market approach.

Although the personal liability rules in Russia are onerous, Sinogeykina reports that there have been no cases of valuators forfeiting their personal assets—so far.

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Ongoing changes and scrutiny of fair value highlight ASA’s June 4 event

The American Society of Appraisers and the University of Southern California Leventhal School of Accounting will hold the 10th Annual Fair Value conference on June 4 on the USC campus. BVWire spoke with Raymond Rath (Globalview Advisors), who is a co-organizer of the event, along with Thomas Ryan (USC Leventhal School of Accounting). “It will be a full day of timely topics and leading speakers,” says Rath.

One of the trends in this area is the continued change in accounting requirements as related to fair value. The FASB and its Private Company Council continue to focus on this area, and potential changes continue to be discussed. “We’ll have an update from Adam Smith of the FASB,” says Rath. Another big trend is the increased scrutiny on fair value from regulators, notes Rath. The SEC has commented publicly about concerns regarding valuations, and PCAOB inspection reports often note audit deficiencies involving fair value estimates. “George Wilfert of the PCAOB will talk about embedded derivatives, which is one of the leading areas relating to restatements,” says Rath. Wilfert will conduct the session with Rob Dominque (Deloitte LLP).

Conference attendees will hear numerous technical insights and an expanded discussion of the challenges valuators face with fair value estimates. An Audit Panel session with Amanda Miller (EY), Steve Stewart (KPMG), Scott Carmelitano (PwC), and Mark Hayden (Deloitte) will discuss these challenges.

“We also have a session on sports valuation and reporting—a fun topic and a good one to use for explaining pricing and valuation,” says Rath. The recent Los Angeles Clippers and Dodgers deals are very interesting examples. “By the way, The USC Marshall School of Business has a regular publication, Fields of Green, that focuses on sports economics,” he says. This session will feature David Carter (USC Marshall School of Business, Sports Business Institute), Michael Rapkoch (Sports Valuation LLC), and Brian Marler (Houlihan Lokey).

Other topics and speakers include:

  • Beyond preferred stock, Amanda Miller (EY);
  • Pepperdine Capital Markets Survey update, Craig Everett (Pepperdine University); and
  • Takeover premia and leverage, Dan McConaughy (California State University–Northridge).

For more information on the conference or to register, click here.

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What the experts say about control premiums

A new special report from BVR on control premiums presents both qualitative commentaries and case studies from numerous experts who address these issues. The report, Update on Control Premiums: What the Experts Say, includes all the necessary quantitative considerations along with coverage of the controversies about the concepts and data, presenting all sides of the argument. In addition, this special report offers a chapter with analysis from the Factset Mergerstat/BVR Control Premium Study, as well as an entire section that presents many state and federal court cases that deal with control premiums, discounts for lack of control, and more. The cases span a wide array of business valuation purposes including: bankruptcy, dissenting shareholder, estate and gift taxes, and marital dissolution cases.

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Venture into the underexplored at NACVA’s annual conference

At the NACVA/CTI Annual Consultants Conference June 24-27 in New Orleans, not only will you learn about leading edge topics and new techniques, you will “venture into an underexplored, but pivotal zone: practice management,” say the conference organizers. There will be special sessions on E/O insurance (James Frazier, Primus Assurance Group), how valuators can make the most out of Excel (David Ringstrom, Accounting Advisors, Inc.), and the Practice Builder Academy (Mel Abraham and Rod Burkert, Burkert Valuation Advisors, LLC). These sessions will teach you how to increase your competitive edge in a world where skill and acumen are no longer enough to ensure success. BVWire will be there—we hope to see you!

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Preview of the June issue of Business Valuation Update

Here’s what you’ll see:

  • Letter to the Editor: IRS S Corp Job Aid Makes Some Assumptions Not Backed Up by Academic Research. An internal IRS document reveals the agency’s most current thinking on the valuation of S corps. Nancy Fannon, CPA, ABV, ASA, MCBA (Meyers, Harrison and Pia LLC), and Keith Sellers, CPA/ABV, CVA, Ph.D. (University of Denver), give their comments on the job aid. Fannon and Sellers are the authors of a new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle (BVR).
  • Book Review: Intriguing Premise: Adjust Cost of Capital for a Supportable PTE Valuation (R. James Alerding, CPA/ABV, ASA). A review of the Fannon and Sellers book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle.
  • How to Use the Income Approach on an FLP With No Income (BVR Editor). The valuation of a family limited partnership typically involves the income approach. But what if you have a non-income-producing FLP? How do you use the income approach when there’s no income? Bruce Johnson, ASA (Munroe, Park & Johnson Inc.), gives an example of how to do it.
  • Snapshots of the Business Valuation Profession Around the World (BVR Editor). BVU attended the 2015 International Valuation Forum in Atlanta sponsored by the International Association of Consultants, Valuators and Analysts (IACVA). One of the fascinating sessions showcased practitioners from different countries who gave an overview of BV practice and the profession in their land. You’ll be surprised at some of the things they reveal.
  • Insights Into Private Company Multiples in the United Kingdom (BVR Editor). The latest information on transaction multiples being paid for U.K. private companies is the focus of a new guide, BVB Insights: Data and Analysis on UK Private Company Multiples, 2015 edition.
  • BVU Profiles: When a Law Firm Gets Caught Up in Divorce: An Attorney and an Appraiser Compare Notes (BVR Editor). Sylvia Golden, BVR’s legal editor, interviews business valuator Stuart Rosenberg (Aronson LLC) and attorney Sanford K. (Sandy) Ain (Ain & Bank).
  • New Features: Ask the Experts and Tip of the Month. Valuation experts answer puzzling questions and give some practical advice on a wide variety of topics.

To read these articles—as well as digests of the latest court cases—see the June issue of Business Valuation Update (subscription required).

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BV movers . . .

People: Two Dixon Hughes Goodman employees were recognized by the Virginia Society of CPAs (VSCPA) as being in the 2015 "Top Five Under 35 Leadership": Brian Burns, a senior manager of forensic and valuation services in the firm’s Richmond, Va., office, and Bryan Campbell, a senior manager of assurance services in the Norfolk, Va., office … James Hart, senior partner at Dent, Baker & Co. of Montgomery, Ala., has been reappointed and confirmed by the Alabama Senate to continue serving another four-year term as commissioner and current chairman of the Alabama Securities Commission (ASC).

Firms: The Chicago-based BDO USA will acquire Stone Carlie & Co. by June 1. This acquisition will not only expand the firm’s reach into the St. Louis market, but will also bring BDO’s annual revenue to more than $1 billion … The Institute of Certified Public Accountants in Ireland (CPA Ireland) and the Association of Certified Accountants and Auditors of Belarus have signed a memorandum of understanding to cooperate in a number of areas, including education, training, examination, accounting, auditing, ethics, and member body development … The Brookfield, Wisc.-based public accounting and consulting firm Vrakas/Blum has changed its name to Vrakas CPAs + Advisors.

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CPE events

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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Holiday Break

BVWire will not be published next week due to the Memorial Day holiday. BVWire will return on June 3. Have a happy and safe holiday!

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

IRS job aid on comp

Goodwill repartee

Pain practices

Global BV news

Rath on fair value

NACVA confab

Control premiums

June BVU preview

BV movers

CPE events











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