Another look at how the recently expanded IRC Sec. 6694 may impact BV Analysts

As we noted last month, (BVWire Issue 72-1) it is certainly a case of BV analysts beware. Tax litigator Charles Rettig (Hochman Salkin Rettig Toscher & Perez, Beverly Hills, CA.) explained at last month’s Summit on Discount for Lack of Marketability (DLOM), co-sponsored by BVResources and the University of San Diego School of Law, that if you do an appraisal and information ends up in any tax return, and is a substantial portion of a position in the return, then you are a non-signing return preparer” (no open quote) for purposes of Internal Revenue Code Sec. 6694 and its possible imposition of penalties. In fact, you never even have to see the tax return, he says.

According to Rettig, there is a reasonable reliance/good faith exception, but given the technical aspects of valuation analysis (especially in such complicated, and controversial, areas as marketability discounts) an analyst’s “reasonable belief” may be difficult and costly to defend, he told attendees.  After all, he says, “can you have that [reasonable belief] in light of the five models for DLOM?”  What’s the bottom line? Rettig cautions that you should be concerned, but not panicked.  “Do your homework, keep your documentation, and be sure to talk to everyone involved” in the subject entity.  IRS regulations and notices are “incredibly user-friendly,” he adds.  For example, see IRS Notice 2007-54 regarding the preparer return penalties and a related FAQ.

Reduced liquidity may lead to larger marketability discounts in the current economy

When public markets are as volatile, as they are today, appraisers may face the risk of double counting—that is, some may factor in decreased market value first in their calculations of enterprise value and then again in their DLOM determinations.  “Volatility influences both the value of future cash flows and also liquidity,” Lance Hall, ASA, (FMV Opinions, New York City) explained at the recent DLOM Summit.

During periods of increased volatility, investors desire an increased ability to sell, so “it makes sense that cash flows might decrease in an analysis, and discounts might also increase, ” Hall told attendees, adding that this is reflected in Ashok Abbott’s (Business Valuation, LLC, Morgantown, WV) analyses of public markets, which show that volatility reduces price—but also widens the bid/ask spread. What do you think? Drop us a line at

More from DLOM: What is the average holding period for minority interests?

At the DLOM Summit, it became clear that the calculation of risk derived from the expected holding period can be one of the more subjective inputs of the analysis, making it that much more susceptible to questions and review.  Models such as the Quantitative Marketability Discount Model (QMDM) specifically require analysts to estimate the holding period risk “in the context of enterprise discount rate and alternative investments, including restricted stocks,” presenter Chris Mercer (ASA, CFA, Mercer Capital, Memphis, TN) told attendees.

The Longstaff method (lookback put option) also requires the analyst to estimate the holding period using guideline company analysis or judgment, Mercer explains noting that by comparison, analysis under the FMV Restricted Stock Study™ looks at the holding period only “to the extent that guideline comparisons with selected transactions …are relevant,” calculating the implied returns over expected holding periods under varying assumptions.  Generally, the Pre-IPO studies, restricted stock studies, and Mandelbaum analysis make a qualitative assessment of the holding period.

What is the average holding period for non-marketable, minority interest?  That’s the question we’ve posed in our latest online survey.  Do you consider the average holding period to be 1-2 years, 2-4 years?  More?  Much more?   The survey will only take a couple of clicks—and we’ve added a second question, too, about the average percentage of project time that you spend on DLOM determinations.  Please click here to take the quick survey; the answers will provide fodder for discussion (including an open Q&A period) during the next BVR teleconference, “Discounts for Lack of Marketability,” featuring Brian Pearson and taking place tomorrow.  Register now.

New resource examines the valuation of Ambulatory Surgical Centers and more

The valuation of Ambulatory Surgical Centers (ASCs) requires numerous considerations specific to the healthcare industry, including issues relating to the impact of management fees. Todd Sorensen, MBA, (VMG Health, Nashville) writes in BVR’s Guide to Healthcare Valuation, “virtually all multi-center owner/operators of ASCs charge the centers a fee of between 4 and 7% of net revenues to provide management services.” Sorensen adds that, “because the owner/operator receives the management fee off the revenue line before operating expenses, the risks associated with the fee are significantly less than the earnings generated by the owner/operator’s equity investment in the ASC. Accordingly, when evaluating multiples from guideline transactions, it is particularly critical to understand whether the buyer received a management fee contract pursuant to the transaction.”
Other nuances to consider when valuating ASCs and other ancillary medical services: 1) out-of-network versus in-network billing; 2) projected volumes and charges; 3) operating expenses and capital expenditures; and 4) global versus technical only billing.  Want to learn more? Use the link above to pre-order an advanced copy of this must-see resource.

Exclusive BVR data finds tax rated as the most profitable practice specialty

Who knows how the tables will turn in light of the worsening national economy, but the good news is that when we surveyed BV professionals for our recently-released 2009 Business Valuation Firm Economics & Best Practices Survey, respondents were very optimistic about what the future would hold. Indeed, our data confirms what many know intuitively: the number of practices offering valuation services has grown at an accelerated rate. Consider too that in addition to drawing revenue from “tried-and-true” areas of specialization—like trusts and estates and family/matrimonial—the BV professionals queried were also poised to tap into new territory.

Which areas generated the most revenue? Not surprisingly, tax work was rated by 20% of survey respondents as “most profitable.” Other areas, ranked in order of respondents’ perceived profitability, include: fraud/forensic accounting (identified by 12% of respondents); fair value (10%); matrimonial/family (9%); and healthcare, transactions, shareholder disputes (tied at 8%). For more information: Deluxe BVU subscribers can glean additional insights on the profession as outlined in our survey by downloading a free executive summary. To get your copy, login to BVLibrary, then click here.

Inside Moves: Calzada joins Deloitte FAS’ valuation practice

Deloitte Financial Advisory Services LLP (FAS) has expanded its Advisory Services practice by naming Hector Calzada, Jr. a director.  During his 16 year career, Calzada has served clients on financial advisory and corporate finance matters, providing valuations, fairness opinions and transaction advisory services. Calzada, who will be based in Atlanta, has industry experience in the healthcare services and life sciences sectors and prior to joining Deloitte, he served as a senior vice president for an international investment banking firm in the healthcare and life science group, where he specialized in financial advisory services.

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