BVR Logo April 1, 2020 | Issue #211-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:



How to deal with COVID-19 for Dec. 31, 2019, valuations

Several BVWire readers have asked about how to treat the COVID-19 issue when you have a valuation date of Dec. 31, 2019. One reader, Judy O’Dell (O’Dell Valuation Consulting CPA LLC) of Rockport, Maine, was doing a Dec. 31, 2019, valuation for an ESOP transaction with a report date of March 11, 2020. The company, a construction firm with projects underway, is based in Maine and does not conduct business outside of the state. As of the date of the report (March 11, 2020), there were no COVID-19 cases in Maine. “I considered the virus a subsequent event,” O’Dell tells us. “The transaction will close shortly and the trustee raised the issue of whether the value should be decreased knowing what we know now. I referred him to AICPA SSVS 1 concerning subsequent events.” Following SSVS, O’Dell included an appendix to the report that included the language of SSVS No 1 VS Sec 100.43. Here is the appendix (client data redacted):

Appendix A—Subsequent Events—COVID-19

The following disclosure information is provided for information purposes only and does not affect the determination of value of 100% of XXX at 12/31/2019.

The AICPA’s Standards on Valuation Services (SSVS No 1 VS Sec 100.43) addresses the analyst’s responsibility regarding subsequent events:

“The valuation date is the specific date at which the valuation analyst estimates the value of the subject interest and concludes on his or her estimated value. Generally, the valuation analyst should consider only circumstances existing at the valuation date and events occurring up to the valuation date. An event that could affect the value may occur subsequent to the valuation date: such an occurrence is referred to as a subsequent event. Subsequent events are indicative of conditions that were not known or knowable at the valuation date, including conditions that arose subsequent to the valuation date. The valuation would not be updated to reflect those events or condition. Moreover, the valuation would typically not include a discussion of those events or conditions because a valuation is performed at a point in time—the valuation date—and the events described in this subparagraph, occurring subsequent to that date, are not relevant to the value determined as of that date. In situations in which a valuation is meaningful to the intended user beyond the valuation date, the events may be of such nature and significance as to warrant disclosure in a separate section of the report in order to keep users informed.”

It appears that the first reported case of COVID-19 virus was in China and was reported on 12/1/2019. As of 12/31/2019 there were no reported cases in the United States. The first reported case in the U.S. was 1/14/2019 which is after the valuation date. We considered the COVID-19 virus in the United States to be a subsequent event. Because this valuation is prepared for an ESOP transaction, we consider this valuation to be meaningful to the intended users and thus are providing this disclosure.

The valuation of XXXX does not consider the possible effects, if any, of the COVID-19 virus on the Company. The valuation reflects conditions as of the valuation date, 12/31/2019.

We ran this by veteran business valuer Harold Martin (Keiter) who responded that the expert, “for the most part, has done essentially what I would have done, i.e., citing the applicable professional standards to which the expert is subject (in this instance, AICPA SSVS1) and then describing factually the circumstances that existed as of the effective valuation date. For valuations as of 12/31/19, I would agree with the position taken by the expert.

“Given that the purpose of the valuation was for an ESOP, I would also recommend that the guidance from the U.S. Department of Labor’s Proposed Regulation relating to the Definition of Adequate Consideration be cited. The Proposed Regulation requires that the ‘fair market value must be determined as of the date of the transaction involving that asset.’ [emphasis added] I would also cite the guidance provided in IRS Rev. Rul. 59-60: ‘Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal.’ [emphasis added]

“I would also recommend clarifying the nature of the subsequent event. For example, the issue is that the coronavirus resulted in a pandemic that has adversely affected market conditions. Finally, I would also recommend citing a reputable source for the discussion of the chronology of events to support the appraiser’s conclusion that these events are, in fact, subsequent to the valuation date.”

Our thanks to Judy O’Dell for allowing us to share this with readers and to Harold Martin for his perspective.

Feedback? Do you agree with this approach? Would you do anything differently? Let us know, and we’ll share it with others if you wish.

Extra: Bring your questions to a free town hall-style webinar, Extreme Uncertainty: How Valuation Experts Should Respond to Today’s Volatility and Risk, on April 7, featuring Gary Trugman (Trugman Valuation Associates), Harold Martin (Keiter, Stephens, Hurst, Gary & Shreaves PC), and Michelle Gallagher (Gallagher & Associates CPAs).

Legal avenues for businesses coping with COVID-19 disruption and damages

In Franchising in the Time of COVID-19, an ABA panel recently discussed the scope of the disruption the pandemic has caused for franchisees and franchisors as well as legal doctrines on which franchisees/franchisors might rely to deal with the monetary damages to their businesses.

This excellent webinar took place on March 23, and the speakers were Kristin Lawrence Corcoran (Franchise World Headquarters LLC), Michael R. Gray (Lathrop GPM), Nicole Liguori Micklich (Urso, Liguori & Micklich), and Tao Xu.

Business interruption insurance: In an effort to stem losses resulting from the pandemic, businesses may consider filing a business interruption claim with their insurance. What losses are covered depends entirely on the individual policy, the speakers say. Consequently, while policies may be similar, they may include different riders and endorsements. Many policies have virus exclusions. Check yours.

The speakers note that, to make a valid claim, a business usually has to show that it suffered a “direct physical loss or damage to property.” Earlier this month, a restaurant in Louisiana filed a case arguing it suffered direct physical damage to the property in that employees who proved to have the virus actually contaminated the workspace, requiring the restaurant to shut down for decontamination. The insurance company should be liable for the cost of deep cleaning as well as loss of income.

The premise of the claim is that health experts know the virus can survive on surfaces up to 28 days. Further, health professionals have acknowledged the waiting times to test potentially affected persons and obtain test results. This delay allowed the virus to linger and contaminate the physical space, the argument goes.

The speakers note that insurance companies are much less likely to entertain arguments for “presumed contamination,” i.e., injury based on the general knowledge (assumption) that the virus is omnipresent. The speakers also note that some insurance policies may cover government-ordered closures; others may not. Again, the language of the individual policy controls the claims businesses can file. Diligently document all losses, file claims, and await the response from the insurance company, the speakers advise. They note that responses to claims and the development of claims are evolving.

Force majeure clauses: In this unrivaled crisis, franchise owners and holders may try to invoke force majeure (FM) clauses to escape certain contractual obligations. This French term, which means “superior force,” generally refers to events beyond the control of a party to the contract that make it impossible to perform under a contract. The ABA panelists note that there is no standard legal definition for FM. The language of a specific contract explains what events may allow a party to abandon the contract. Often, FM clauses in contracts expressly exclude health crises. It is not clear whether federal, state, or local orders that prohibit or make difficult movement, the performance of certain services, and access to certain supplies qualify as FM. The panelists caution that parties to a contract cannot escape performance just because doing so has become too expensive. Anyone thinking of pursuing this avenue must pay close attention to notice deadline requirements, the panelists advise.

D&P increases recommended U.S. ERP
to 6.0%

Duff & Phelps has increased its recommended U.S. equity risk premium (ERP) from 5.0% to 6.0% for use as of March 25, 2020, according to a client alert. This new rate, used in conjunction with a normalized risk-free rate of 3.0% (reaffirmed), implies a “base” U.S. cost of equity capital estimate of 9.0% (6.0% + 3.0%). “To be clear, this means that for critical quarter-end valuations dated March 31, 2020, the recommended ERP is 6.0%,” the firm says. “However, several economic and financial risk factors that we evaluate were already present during the week of
March 9, 2020.

The IRS to BVers: We want you!

No, not for an audit—the IRS is looking for experienced business appraisers to fill six open positions across the U.S. The salary ranges from $92,568 to $137,045 per year, and the jobs include telecommuting opportunities, “great benefits including pension, and a true 40-hour work week,” the agency tells us. To get all the details, including job description, experience requirements, locations offered, how to apply, and more, just click here.

Will BV experts see a spike in divorce business?

Yes, it’s likely if the trend in China spreads to here. Divorce rates there have risen significantly because “couples are spending too much time together at home” during coronavirus self-isolation, according to an article in the UK’s DailyMail.com. The divorce rush has triggered at least one city in China to put a daily limit to allow no more than 10 couples to divorce per day.

Extra: The AAML/BVR National Divorce Conference (September 10-12 in Las Vegas) is adding flexible attendance options to make it easy for you to attend live or online. Plus, there is a risk-free cancellation policy with 100% full refunds being issued up until August 10 (a month before the event). To register, click here.

How to manage your BV career momentum amid the crisis

Valuation professionals who maintain career momentum during this time of crisis will stand out when it’s all over. Attend a free webinar on April 10 conducted by John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years. He’ll give some advice on how to keep the fire lit under your career to keep it moving forward in tough times. You can register for this free webinar, The Future Isn’t What It Used to Be: Managing Your Career Momentum, if you click here.

List of links to COVID-19 updates from the valuation community

If you click here, you can get a list of links to the latest insights, research, and guidance in relation to the COVID-19 pandemic published by various valuation organizations and professional bodies. The International Valuation Standards Council (IVSC) compiled the list as a convenience. (Note: The IVSC is not responsible for, nor can it guarantee the veracity of, the content published, the organization says.)

EIU: Global economy will contract by 2.2%

In the wake of the coronavirus outbreak, the Economist Intelligence Unit (EIU) has revised its growth forecasts for all countries across the world, and the picture is “bleak,” it says in a report.

Across the G20, all but three countries (China, India, and Indonesia) will register a recession this year, it says, finding that the global economy will contract by 2.2%. The U.S. economy will contract by 2.8% this year, partly due to the administration’s initial poor response to the coronavirus, allowing the illness to spread quickly, the report says. “We assume that there will be a recovery in the second half of the year, but downside risks to this baseline scenario are extremely high, as the emergence of second, or third waves of the epidemic would sink growth further,” says Agathe Demarais, the EIU’s global forecasting director.

BV movers . . .

People: Alec J. Marotto, CPA/ABV, was promoted to principal in the accounting and auditing department at Tronconi Segarra & Associates LLP (Buffalo, N.Y., area).

Firms: Prairie Capital Advisors Inc. has added a financial reporting valuation practice, which will offer purchase price allocation, goodwill impairment testing, equity-based compensation appraisals, portfolio and fund valuations, as well as other fair value appraisals; Dan Callanan, ASA, who joined the firm in August 2019, will lead the new practice team … RotenbergMeril moves to larger (22,000 square feet) and more modern headquarters within its current Park 80 West office plaza in Saddle Brook, N.J. Enterprise, Ala.-based Carr Riggs & Ingram (CRI) has acquired Barraclough & Associates of Santa Fe, N.M.; the firm joins more than 1,800 CRI professionals serving clients across the southern U.S.

Please send your professional and firm news to us at editor@bvresources.com.

CPE Events

  • Built for BV: The New Platform for Guideline Public Company Comps (free webinar) New Date: April 21, 10:00 a.m.-11:00 a.m. PT/1:00 p.m.-2:00 p.m. ET.
    Featuring: Adam Manson (Business Valuation Resources) and Oday Merhi (Business Valuation Resources).

    Learn how to streamline your guideline public-company comparable searches and results by using a new platform that uses a structure similar to the DealStats platform.



We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com.


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