BVWire Issue #169-1 | October 5, 2016


Is the IRS using a ‘kitchen sink’ strategy for Sec. 2704 regs?

One of the surprises in the proposed Section 2704 regulations designed to curb estate valuation discounts is that they apply not only to family entities holding marketable securities, but to family operating businesses as well. This was not expected. But maybe we should not have been surprised?

Overshooting: “Is it possible that the IRS is asking for too much so that it can scale back and get what it wanted in the first place?” asked Gil Matthews (Sutter Securities Inc.). Matthews posed this question to a panel at the recent ASA Advanced Business Valuation Conference in Boca Raton. Of course, no one knows what the IRS really had in mind, but this is possible. It’s well known that the IRS has been targeting abuses of valuation discounts by family entities that hold marketable securities, and it could have easily left operating businesses out of the proposal. Anticipating the pushback (evidenced by the IRS setting a public hearing date right off the bat), the agency could be asking for more than it wanted with the idea of “compromising” and, for example, taking active businesses out of the mix.

Regardless of what the IRS has in mind, speakers urged attendees to submit comments to the IRS before the November 2 deadline. John Russell, the ASA’s director of government relations, pointed out that there is a simple web form to use for this. “The only way to derail this train is with a very loud set of comments,” Russell says. “But it’s also important to reach out to your small business clients who will be most affected by these regs and get them involved. They may have relationships with members of Congress that they can leverage to help fight these regs.”

Congress reacts: During a recent BVR webinar, Curtis Kimball (Willamette Management Associates) and  Z. Christopher Mercer (Mercer Capital) gave a thorough analysis of the valuation impact of the regs. They told the audience that there is support in Congress to quash the proposed regs. In the House, Republicans have introduced two bills, H.R. 6042 and H.R. 6100, to nullify the proposed regs. The latter bill, the Protect Family Farms and Businesses Act, prevents any federal funds from being used to finalize, implement, or administer the regs. In the Senate, members of the Senate Finance Committee are among those who have sent a letter to Treasury Secretary Jacob Lew requesting that the proposed regs be withdrawn.

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Valuation doesn’t pass smell test with the Bankruptcy Court

Shareholders in a bankrupt company rarely get to form an equity committee that represents their interests during the reorganization proceedings. But, in an extraordinary bankruptcy case, shareholders, crying foul over the valuations of the company, persuaded the court a committee was necessary.

‘Dramatic’ value adjustments: The subject was Horsehead, a leading producer of zinc and manufacturer of value-added zinc products. The company had two profitable subsidiaries but ran into trouble with its plan to build a state-of-the-art plant in North Carolina. Although the company experienced difficulties in 2015 and 2016 due to declining zinc prices, in December 2015, management, in numerous public statements, represented there was sufficient liquidity to continue operating and proceed with the building of the plant. A KPMG valuation report suggested the company was worth $1.1 billion.

However, two months later, the company filed for Chapter 11 bankruptcy. A valuation on behalf of the debtors lowered the value of the company to between $255 million and $305 million. The analysis essentially assigned zero value to the plant, in which the company had invested between $500 million and $550 million. Shareholders challenged the debtors’ post-petition valuation and asked for an equity committee. As they saw it, company management, confronted with problems, surrendered control to “a savvy hedge fund” that tried to exploit its knowledge of bankruptcy proceedings to quickly take over the company’s assets for less than adequate consideration.

Shareholders, including several well-spoken, knowledgeable investors, took particular issue with the zero valuation of the plant.

The court agreed that the company’s actions raised questions. “To put it bluntly, something doesn’t smell right to the Court,” the bankruptcy judge said. He referred to unexplained, “dramatic” adjustments in valuation in a short period. The court ordered the formation of an equity committee.

The case is In re Horsehead Holding Corp., 2016 Bankr. LEXIS 3187 (May 2, 2016). A case digest and the court’s opinion will be available at BVLaw.

Extra: The hearing features candid, and highly readable, testimony by personal investors who know their way around valuing a company. A transcript is available here, courtesy of BVLaw.

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More takeaways from the ASA Advanced BV Conference

Last week’s BVWire presented some takeaways from the ASA Advanced Business Valuation Conference in Boca Raton. Here are a few more:

For sports franchises, typically 90% of value is in intangibles, says Drew Dorweiler (Dartmouth Partners Limited).

The Appraisal Foundation’s Market Participant Acquisition Premium (MPAP), or control premium, guidance will eventually extend beyond fair value for financial reporting into other areas of appraisal, says Eric Nath (Eric Nath & Associates LLC).

A majority of cross-border M&As are not successful, points out Neil Beaton (Alvarez & Marsal).

John Finnerty (Alix Partners) is working on a paper concerning the use of multi-regression for the guideline public company method. He will make a copy available to us as soon as it’s ready and we will provide you a link.

Statistics, particularly regression analysis on key business drivers, can be used to do the “but for” forecast for calculating lost profits, say Michael Crain (Financial Valuation Group) and G. William Kennedy (Berkeley Research Group LLC).

When valuing a firm in the legal marijuana industry, focus on the “Four Ls”: license, lease, location, and legislation, advises Ron Seigneur (Seigneur Gustafson LLP).  

Awards: During a luncheon, awards were bestowed on a number of individuals representing all of the appraisal disciplines: Roger Durkin (Durkin Law, P.C.) for the Lifetime Achievement Award; Nelson Clayton (Appraisals of Distinction, LLC) and Z. Christopher Mercer (Mercer Capital) for College of Fellows; William Quackenbush (Advent Valuation Advisors) for Examiner of the Year; Jan Marek (Deloitte) for the Jerry F. Larkins Award; Cinthia Giannakos (ASA) for the Sylvia Wade Olson Award; Paul Roberts for the Chapter Member of the Year; ASA’s Europe Chapter for the Professional Education Program Award; ASA’s Chicago chapter for the Outreach Program Award; and ASA’s NorCal chapter for the Chapter of the Year Award. BVWire congratulates all of the recipients.

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New master’s program in BV launches January 1

BVWire traveled to Atlanta last week for the SECBA/IACVA Southeast Regional Conference, where we learned that the state of Florida has given its stamp of approval to a new master of business valuation (MBV) program offered by the Florida Institute of Finance College. This is an online, self-paced program that awards graduates with a Business Certified Appraiser (BCA) certificate from the International Society of Business Appraisers (ISBA). The program also prepares students for other BV certifications, including the Certified Valuation Analyst (CVA) and Accredited Senior Appraiser (ASA) designations.  For more information on the program, which will begin January 1, click here

BVWire will have more coverage of the SECBA/IACVA conference in next week’s issue. SECBA is the Southeast Chapter of Business Appraisers; IACVA is the International Association of Consultants, Valuators and Analysts.

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Winery owners struggle with valuation

He considers himself a sophisticated financial analyst, but Bill Price struggles with how to value a vineyard, he says in an article in the New York Times. Price is a founder of a large private equity firm who now owns a number of vineyards and wineries. While price is a key measure of value, it all comes down to the owner’s purpose, the article indicates. Some owners see it as a serious business, others as a hobby or trophy property. The purpose will drive the type of land that’s purchased, and the cost of the land will depend on the price of grapes, which range from $500 per ton to $10,000 per ton. Buying land and creating a vineyard could take up to five years before it bears fruit at an average annual return of 4% to 5% on the sale of grapes, the article states.

If you’re one of those struggling with winery valuation, take a look at What It’s Worth: Winery Value, which includes advice from top experts who work directly with wineries and study valuation issues associated with these entities.

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Latest Willamette Insights focuses on gift, estate, GST tax valuations

The winter 2016 edition of Willamette Insights is devoted to gift, estate, and generation-skipping transfer tax valuation. The edition’s editor, Fady F. Bebawy, has included some excellent articles, all written by experts at Willamette Associates. The articles include a review of the IRS Job Aid on the valuation of noncontrolling ownership interests in S corps (Curtis R. Kimball), a discussion of the proposed IRC Section 2704 regulations with regard to FLP valuation discounts (Weston C. Kirk), an article on estimating capital expenditures and depreciation expense in the direct capitalization method (Aaron M. Rotkowski and Matt C. Courtnage), several articles by Robert Reilly on goodwill in closely held companies, an explanation of the factors S corp buyers and sellers should consider making a Section 338 election (Robert P. Schweihs), and more. You can access a full copy here.

Extra: The BVWire News blog was cited in the Willamette article on the Sec. 2704 regs. The blog is a great way to keep up to date on the BV profession. You can sign up for it here.

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Global BV news:
D&P updates data relevant to Brexit’s impact on cost of capital

This past July, Duff & Phelps presented a webcast on the impact of the Brexit vote on cost of capital. The firm has released a report that summarizes the issues discussed during the webcast and provides updates to some of the data presented. The report also discusses some recent economic and financial market developments that are relevant to the matter.

The speakers on the webcast included Aswath Damodaran (New York University Stern School of Business), Elroy Dimson (Judge Business School, University of Cambridge), Pablo Fernández (University of Navarra—IESE Business School in Spain), Roger J. Grabowski (Duff & Phelps), and Yann Magnan (Duff & Phelps). One message all of the speakers stressed is to maintain internal consistency between the elements of cost of capital and the current economic environment. Also, you need to consider that there may be a “new normal,” i.e., lower interest rates, higher risk premiums and slower growth. As for the equity risk premium (ERP), the D&P report recommended that ERP as of Jan. 31, 2016 (5.5%) should continue to be used, as the risks associated with Brexit did not warrant a change.

Postscript: In looking at recent developments in terms of the economy and equity markets, the report points out that there have been conflicting reports as to the effects of Brexit. Some reports suggest that the negative impact was temporary because the markets have bounced back. Others believe the recent recovery does not guarantee that there will be no negative short-term impact. “The reality is that it is still too early to ascertain what the ultimate impact will be to the U.K. economy,” the report says. In terms of interest rates, measures taken by the Bank of England have kept interest rates at historical lows, as was expected.

In light of recent developments, the financial markets will continue to be distorted “for the foreseeable future.” That means that you need to consider whether to adjust expected cash flows and discount rates when doing valuations—and make sure you’re internally consistent.

You can listen to a complimentary replay of the webcast if you click here.

The Duff & Phelps Valuation Handbook series includes the 2016 International Valuation Handbook – Guide to Cost of Capital and its companion volume that focuses on specific industries, the 2016 International Valuation Handbook – Industry Cost of Capital.

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BV movers

People: Robert Carter, senior manager at Hertzbach & Company of Maryland and Virginia, was named as a 40 Under 40 honoree, among the best and brightest talent in the accounting profession … Jay Fishman, managing director of Financial Research Associates, was awarded the ASA Philadelphia chapter’s George D. Sinclair FASA Professionalism Award in recognition of his outstanding leadership and service to the Philadelphia chapter, the appraisal profession, and the public … Thomas Giordano, director of litigation and valuation services at New York City firm Anchin, Block & Anchin, was elected trustee at the Scarsdale Foundation, an organization that has helped the community through grants and scholarships since 1923 …  Becky Roof, managing director at AlixPartners and local market leader for the Houston region, will lead the firm’s new Houston office.

Firms: Citrin Cooperman was honored as one of the Best Corporate Investigations Providers by the New York Law Journal … In a move to expand its footprint in North Carolina, the Greensboro-based DMJ & Co. announced its merger with Hutchings & Hutchings CPAs, a Durham firm with over 70 employees and 10 partners … Solidifying its traction in Canada, Duff & Phelps has acquired the Ontario-based Campbell Valuation Partners and its affiliated corporate finance firm, Veracap M&A International. The entire teams of both organizations will be joining Duff & Phelps.

Please send your professional and firm news to us at

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Upcoming CPE events

Valuing Trained and Assembled Workforces in Healthcare Provider Entities: A Deep Dive (October 13), with Timothy Smith and Angie Smith. This is Part 6 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Premiums: Are You In or Out of Control? (October 18), with James Ewart (Dixon Hughes Goodman)

Projecting But-For Profits (October 20), with Stacey Udell (Gold Gerstein Group). Part 6 of BVR's Special Series presented by The Comprehensive Guide to Economic Damages.

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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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

IRS ploy re: 2704

Fishy valuation

ASA takeaways

New MBV program

Winery puzzle

Gift/estate issues

Global BV news

BV movers

CPE events



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