In a prior issue of BVWire, we presented one valuation expert’s way of dealing with the coronavirus in valuation reports before it was known or knowable. In an appendix to her report, she considered the coronavirus a subsequent event as of the valuation date (Dec. 31, 2019), explained why she did so, and stated that the determination of value does not consider the effects of the virus. She also cited the language of the standards she was following, namely, the AICPA’s Standards on Valuation Services (SSVS No. 1 VS Sec 100, paragraph 43). This treatment is essentially consistent with the recently released AICPA VS Section 100 Subsequent Event Toolkit, a helpful resource that includes frequently asked questions and sample disclosure language. The Toolkit reminds valuers who adhere to VS 100 that the disclosure of a subsequent event is not required—it is up to the analyst to decide whether or not it is appropriate to make the disclosure.

Poll: Some valuation experts expect an increase in business

During BVR’s recent town hall webinar on the valuation impacts of COVID-19, 25% of the audience said they expect business valuation engagements to “increase slightly” and 21% said business will stay the same. The rest expected business to drop, with 19% saying it will drop a “little” (meaning 10% or less), 22% saying “some” (11% to 25% drop) and 13% saying it will decrease “significantly” (more than 25%). We received over 900 responses to the poll.

Panel members commented: “I anticipate possible increases in business over the next six months, especially in the family law area,” says Michelle Gallagher (Adamy Valuations). “We are doing multiple valuations potentially in the estate and gift area for transactions happening right now or in the very near future.” She also felt that her firm will be busy with litigation. Gary Trugman (Trugman Valuation) also expects to get busier. “Obviously, we have a big litigation practice. I have four trials and two depositions already cancelled, which is not good for business, but we are still getting phone calls about other types of valuation,” he says. “We are just rethinking how we bid those jobs so that we can keep the jobs coming to keep our own cash flow going.”

We hear that some firms, especially those that include a traditional CPA practice, are finding a new niche: counseling clients through the government stimulus programs for small business and then handling the recordkeeping for inevitable audits (especially for the forgivable loans).

Are BV firms’ hiring plans impacted? “We are planning on hiring a new associate,” reports Harold Martin (Kieter). “Our firm is taking the position that we will obviously watch things very closely, but we are proceeding with the expectation that we will come out of this.” He recalls being with two of the (then) Big Eight firms that delayed hiring during a tough time, and, while they saved costs in the short term, “it came back to bite us two years down the road when we were missing all those staff.” Stacy Preston Collins (Financial Research Associates) made an interesting point as to the difficulty of training someone 100% remotely during the current lockdown. “I have done a little bit of that in the short term, but I would worry a little about hiring someone and having them work from home full-time,” she says. “I think I would want to wait until people were back in the office just in terms of a learning issue. But barring that, I don’t foresee any issues. I just want to have a situation conducive to a new person learning because so much of it is on the job.”

Extra: Another free town hall webinar will be held on May 6, Valuation and COVID-19 Update: BVR Townhall and Q&A.

PwC survey: CFOs become less optimistic about recovery time

“Hopes that the outbreak will dissipate quickly are receding,” according to the PwC COVID-19 CFO Pulse Survey. “Only one in five respondents now believes they’ll be back to business as usual within a month once the outbreak ends. In contrast, during the week of March 9, as shelter-in-place orders started taking hold in the U.S., 66% of U.S. and Mexico respondents estimated that their companies could recover within a month.” PwC is conducting a biweekly survey of finance leaders in the U.S., Mexico, and 19 other territories. The next set of results will be released April 27.

Appellate court ruling unfavorable to cannabiz

Section 280E of the tax code prohibits taking tax deductions for business expenses related to marijuana because of its status as a Schedule I controlled substance. Legal cannabis firms can deduct cost of goods sold, but not being able to deduct operating expenses is a major problem—these firms could actually pay more in taxes than they make in profit. There has been some hope that Section 280E would be found unconstitutional, but a new case is not good news in that regard.

New case: A medical cannabis dispensary in Denver has lost an appellate court battle to prevent the IRS from obtaining business records from state regulators. The IRS is auditing the firm to see whether it took improper business deductions. The U.S. Court of Appeals for the 10th Circuit ruled that the IRS auditor did not act in a way that was overbroad or violated the rights of the company owners. The court also said that, despite the dissent in another case (Northern California Business Associates), Section 280E does not violate the 16th Amendment, stating: “The dissent opined that Congress had exceeded its Sixteenth Amendment authority in enacting §280E.… We are unpersuaded by this dissent. We agree with the majority, which ruled that §280E falls within Congress’s authority under the Sixteenth Amendment to establish deductions.” The case is Standing Akimbo, LLC et al. v. United States of America, which can be accessed if you click here.

We thank Ron Seigneur (Seigneur Gustafson LLP) for alerting us to this case. Seigneur is co-author of “Cannabis and Hemp Valuations: A Market Analysis” (a BVR Briefing) and The Cannabis Industry Appraisal and Accounting Guide.

Special COVID-19 issue of Business Valuation Update

Normally, Business Valuation Update is available only to subscribers (or subscribers of the BVResearch Pro platform). But the May 2020 issue has a number of articles devoted to the valuation impacts of the coronavirus, and BVR is making it available for purchase as a stand-alone issue for nonsubscribers. Click here for more information. The feature articles in this issue are:

• “A Veteran Valuer’s Guidance on COVID-19 and the ‘Soul’ of a Business” (BVR Editor). An interview with Robert Schlegel, FASA, MCBA (Houlihan Valuation Advisors), in which he gives his perspectives on our current economic environment and how that affects the business valuation community.

• “The Valuation Paradigm of COVID-19: Using the DFC Method After an Economic Crisis” (Craig Jacobson, Dan Korczyk, and Richard Peil, GlassRatner, a B. Riley Financial Company). The challenge amid today’s market disruption is to revert back to the foundational elements of valuation and how to properly apply those “blocking and tackling” fundamentals during very untraditional times.

• “A Revisit of ‘Known or Knowable’ and Subsequent Events in the COVID-19 World” (Robert B. Morrison and Alexander Dokuchaev, Rosenfield & Co. PLLC). The authors have a recurring client for whom they perform an annual valuation as of December 31. They give a best practice suggestion as to how to address the coronavirus in their valuation report. The article includes a COVID-19 timeline they developed.

• “Perfect Storm: COVID-19 and 2020 Election—Unexpected Windfall for E&G Tax Planning” (Chris Rosenthal and Brian Broxterman, Vallit Advisors). Insights into the impacts on the estate and gift tax area and the opportunities it presents for business valuers.

• “A View From the UK on the Cost Approach Amid the Current Crisis” (Andrew Strickland, FCA). The Cinderella of business valuation approaches is likely to make it to the ball when we start to count the economic cost of the present crisis.

• “Is History Repeating Itself? A List of BV Guidance From the 2008 Financial Crisis” (BVR Editor). Insights from business valuation history can give some degree of help during today’s crisis. Here are some blasts from the past courtesy of the search capabilities of the BVResearch Pro platform.

Top transactions featured in the 2020 Mergerstat Review

The 2020 edition of the Mergerstat Review delivers comprehensive rosters and statistics on M&A between U.S., UK, and global privately held, listed, and cross-border enterprises. And, as always, the Review is the most reliable source for both control premiums by year and industry multiples. Data for each annual edition are sourced from FactSet Mergerstat global mergers and acquisitions data—and expert analysts verify all data. The 2020 Mergerstat Review is now available (in PDF—early May for the print edition) and includes:

• Summary data on the top 100 deals worldwide;

• New tables that analyze metrics of the top 20 UK deals;

• Additional tables are now included for top deals in Canada, Latin America, Asia, and the EU;

• The annual update captures 20 years of historical M&A data and reflects the most up-to-date snapshot of the FactSet Mergers & Acquisitions database;

• The popular industry metrics section is included again this year;

• Top 100 global deals summary;

• Details on premiums paid over the targets’ enterprise values; and

• Details on private equity transactions and activity, including unit divestitures, management buyouts, and certain asset sales.

The Mergerstat Review helps analysts guarantee they never omit a major comparable transaction and is one of the most referred-to sources of industry pricing, premia, and payment terms. Each annual subscription includes current updates via the Mergerstat Monthly Review.

IPEV issues special guidance for March 31 valuations

The International Private Equity & Venture Capital Valuation Guidelines Board (“the IPEV Board”) has issued special guidance with respect to applying the IPEV Valuation Guidelines when estimating fair value at March 31, 2020, which will be “very challenging.” While the alternative asset industry is “strong and robust,” the COVID-19 crisis is “different from crises in 2001/2 and 2008/9,” says IPEV. “The current crisis has impacted more people, more businesses, more rapidly than any crisis in recent history.” The special guidance addresses equity and debt investments as well as limited partnership interests and includes this caution on “double dipping,” which can apply in other valuation contexts as well:

Care should be taken not to “double dip” with respect to valuation inputs—if performance metrics have been adjusted to take into account lower expected performance, an appropriate multiple should be applied rather than a multiple derived from comparable public companies whose results have not yet included lower expected performance. The same concept applies when using the income approach, discounted cash flow (DCF). If future cash flows have been adjusted the increase in the discount rate may be less than the increase in the discount rate if cash flows have not been adjusted for the impact of the crisis.

BV movers . . .

People: Antonella Puca, CPA/ABV, CFA, CEIV, has joined Alvarez & Marsal Valuation Services LLC as a senior director in the firm’s New York City office … John M. Byrne, CPA/ABV, has joined Axiom Valuation Solutions as managing director and will be operating from the firm’s Phoenix office.

Firms: Richmond, Va.-based Cherry Bekaert has acquired the Tax Advantage Group (TAG) of Greenville, S.C., a consulting firm that specializes in New Markets Tax Credit (NMTC) services … Duff & Phelps has confirmed the completion of its acquisition by a global investor consortium led by funds managed by Stone Point Capital and Further Global for $4.2 billion.

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

CPE events

• Valuing Distressed and Impaired Companies in the Time of Coronavirus. April 22, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: R. James Alerding (Alerding Consulting LLC)

How to value a distressed or impaired business with a focus on the particular issues that need to be considered relating to the current pandemic.

• Healthcare Valuation in the Corona Virus Era: That Was Then, This Is Now. April 28, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Mark Dietrich (Mark O. Dietrich CPA, PC). BVR’s Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance

  COVID-19 has impacted perhaps no industry in such a complex way as healthcare, so here is what to consider before you do your forecasts.