When was COVID-19 known or knowable for valuation purposes? To help determine this, Jim Hitchner (Valuation Products and Services) and his staff have prepared a timeline of significant events, including the pandemic’s effect on the U.S. stock market, and they are graciously sharing it with everyone. The timeline comes complete with footnotes and a bibliography, and you can find a link to it on BVR’s COVID-19 Resource Page under Additional Resources.

Consensus on date? There is no single date that everyone can use for determining when the virus was known or knowable—it depends on the facts and circumstances of your subject company. For example, a company with all local customers and suppliers would be in a different situation than, say, a company that depends on a supply chain in another part of the world. That’s why it’s important to consider timelines in your analysis. Another helpful timeline to look at is one the business valuation and forensics team at Rosenfield and Co. PLLC prepared, and it is available if you click here.

Business interruption cases and the role financial experts can play

To mitigate the impact of COVID-19, business owners have increasingly turned to business interruption insurance. Two recent, pre-COVID-19, cases deal with litigation arising out of business interruption claims and point to opportunities for damages and valuation experts.

The Binghamton case involved a company that custom-made precast concrete products for the construction industry. It operated on a tight production schedule. The plaintiff had insurance for equipment breakdown. In June 2015, one of its concrete mixers broke down and caused an interruption in production until the mixer was repaired and resumed operations two days later. The plaintiff’s policy provided coverage for “actual loss of Business Income” during the restoration period and extra expenses incurred by operating the business during the restoration period. “Business income” was net income (net profit or loss before taxes). The plaintiff filed a claim with the defendant insurer for lost profits, showing production before, during, and after the breakdown and applying its profit margin during this time to the lost production.

After the insurance company denied the claim, the plaintiff filed suit for breach of contract. The trial court denied the defendant’s summary judgment motion, and the case went to the appellate division of the New York Supreme Court (trial court).

The defendant unsuccessfully claimed, under the policy, the plaintiff had to show it lost specific sales as a result of the equipment breakdown during the short restoration period. The appellate court said this was not a reasonable interpretation of the policy, which nowhere mentioned specific sales or indicated an intent to narrow coverage in the way the defendant argued.

Takeaway: Courts look to the individual business interruption policy to determine the merit of a claim.

Optical Works & Logistics involved a fledgling optical media company that suffered extensive damage to expensive, specialized machinery and equipment and the property out of which the company operated as a result of two major storms that hit the area about a month after the company had started operations. The company had business interruption insurance, but the insurer ultimately denied the claim. The company filed a breach of contract suit and alleged bad faith on the insurer’s part. It said that, while losses could have been limited to between $50,000 and $75,000 had the insurance company provided prompt coverage, damages rose to over $4 million and ultimately resulted in the company’s insolvency. The insurer asked the court for summary judgment, but the court denied the motion, finding there were too many disputed issues of fact.

As an example, the court mentioned the insurer made various assertions that the company was new and was not a viable business even before the storm. There was no evidence of expenses incurred before the storm, the insurer said, and, therefore, the company was not entitled to coverage of continuing operating expenses. But the plaintiff argued its consulting expert projected what expenses it would have incurred had it received the benefit under its policy and been able to successfully continue its operations. According to the court, determining when and whether the company could have resumed normal business operations presented “the type of murky factual question” that was best resolved by a trier of fact.

Takeaway: Financial experts can become involved in business interruption cases early, as consulting experts, either to support or dispute damages and valuation claims, and, as such, may play a key role in keeping a case alive or not.

For claims related to the coronavirus, there is an expectation that insurance companies will fight hard against having to pay. It all depends on your individual insurance policy. Insurers will try to argue that there is an exemption to coverage of the virus, or they may argue that the insured cannot show physical harm to property, which is a prerequisite to coverage. As you can see from the cases discussed above, insurers often fight long and hard to avoid having to pay out.

Digests of Binghamton Precast & Supply Corp. v Liberty Mutual Fire Insurance Co., 2020 NY Slip Op 02214 (April 9, 2020), and Optical Works & Logistics, LLC v. Sentinel Ins. Co., 2020 U.S. Dist. LEXIS 53987 (March 26, 2020), and the courts’ opinions will be available soon at BVLaw.

BizMiner launches free help for your small-biz clients

BizMiner, a provider of industry and geographic data business valuers use, has launched a public service called the LOOK UP! Initiative. Small-business owners can receive two free reports with unique custom data and a narrative that quantifies the opportunities and challenges facing their business during the current crisis. All they have to do is make a few selections and provide some inputs, and the reports will be generated—and updated each month free of charge while the crisis lasts.

Where you come in: Business owners may need some help in requesting and interpreting these reports, so, if you alert them to the LOOK UP! Initiative, you could offer to help them. Also, as part of the initiative, business owners will receive a Vestimate®-Plus, which is a soft value range for their business. This may also prompt questions for you to answer and may trigger interest in a full-blown valuation.

BizMiner offers a sample support outreach email, and you can also get a special affiliate link to track the number of small businesses you were able to help. “We’re providing this content to encourage you, and those who depend on the success of your firm, to lift your eyes to the future during this challenging time,” says Jon Brandow, owner of BizMiner. For more details, the LOOK UP! Initiative landing page can be reached if you click here.

SEC proposes a framework for fund valuation practices

The SEC has issued a proposed rule, Good Faith Determinations of Fair Value, that would “establish requirements for determining the fair value in good faith of a fund’s investments and would permit boards to assign the determination to the fund’s investment adviser, subject to board oversight and certain other conditions.” SEC commissioner Hester M. Peirce says in a statement: “The timing of this proposal during the COVID-19 crisis and attendant economic and market instability affords us the opportunity to learn from the very fresh-in-mind difficulties that funds and other market participants confront in valuing securities during highly volatile market conditions.” Comments on the proposal are due by July 21.

Cannabiz put to the test amid COVID-19

April 20 was supposed to be the once-a-year Black Friday for the legal cannabis market, but, instead, the industry is bracing for an economic blow from the coronavirus crisis. BVWire spoke with Ron Seigneur (Seigneur Gustafson LLP), a Colorado practitioner who has been involved in cannabis industry valuations for years. “We predict a significant drop in sales in many parts of the cannabis industry, unless the economy re-opens and rebounds quicker than expected,” he says. He also gave us a few more interesting insights:

• Currently, cannabis operators cannot apply for PPP loans, and this may apply to professional service firms that get most of their business from this industry. The CARES Act specifically prohibits businesses that are illegal at the federal level, including ancillary companies that get revenue from such businesses, from accessing the stimulus money. Legislation has just been introduced in the House that could change this.

• Consolidation is already happening in the market, and it will accelerate.

• Cannabis is deemed an essential service in most jurisdictions for now but with new restrictions on how consumers can purchase product. But curbside sales are now happening, and there’s more pressure for home delivery—concepts that were off-limits a short time ago.

• There is a potential oversupply of product coming due to decreased demands that might not be evident until after the April 20 holiday and initial surge after folks no longer are ordered stay at home.

• Capital will be more scarce than ever, and there will be more bottom feeders, particularly in the emerging markets as opposed to places such as Colorado and Washington.

The issues mentioned above are just a few examples of how dynamic the cannabis sector is today amid the uncertainty that all businesses face. While the future may be bright for some, it will be a mighty struggle for others as they try to “redefine a path to success,” he notes. Seigneur is co-author of “Cannabis and Hemp Valuations: A Market Analysis” (a BVR Briefing) and The Cannabis Industry Appraisal and Accounting Guide.

New guideline public comps tool makes public debut

A large audience watched the first public demo of an affordable alternative to existing platforms on the market that appraisers use for the guideline public-company method (GPCM). BVR’s Guideline Public Company Comps Tool lets you instantly access complete financial statements, financial ratios, and multiples for comparable companies—and then easily save your comps. Questions from the audience provided a more detailed look at the new tool:

• Where do you get the data? BVR has partnered with Intrinio, a financial data company, which sources the data from public-company filings with the SEC;

• How often are the data updated? The tool is updated daily with data from new 10-Qs and 10-Ks, typically captured within 30 minutes of being filed with the SEC.

• Can the tool suggest additional comparables to include in my analysis based on the comps I have already identified? Yes. The tool provides suggested companies that are derived from those that were used in sets of guideline comparable companies in fairness opinions. BVR conducts proprietary research on these comparable company sets and maps them into the tool.

• Can I export the results to Excel? Yes, and an Excel add-in is included with the subscription.

A recording of the free webinar is available. To learn more about the Guideline Public Company Comps Tool and request your own demo, call BVR at 1-503-479-8200 or email at info@bvresources.com.

Sequel to BVR’s free town hall webinar May 6

By popular demand, BVR will hold a second free town hall webinar, Valuation and COVID-19 Update: BVR Townhall and Q&A, on May 6. Registration is free, and you can earn two CPE credits. Send early questions and comments to questions@bvresources.com. Panel members will be: Stacy Preston Collins (Financial Research Associates), Michelle Gallagher (Adamy Valuations), Harold Martin (Keiter, Stephens, Hurst, Gary & Shreaves PC), and Gary Trugman (Trugman Valuation).

Show must go on(line): ASA Energy Valuation Conference May 13

BVR is pleased to partner with the Houston Chapter of the American Society of Appraisers (ASA) to present the Energy Valuation Conference in Houston, in an online-only format on May 13. This is the 10th year for this conference, and it has been converted from in-person to online-only due to COVID-19 instead of canceling or rescheduling. As in prior years, the agenda will feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry. The conference provides eight hours of CE/CPE, and you can register if you click here.

Cost of capital parameters in Europe as of
March 31, 2020

ValueTrust has released a special edition (fifth) of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. ValueTrust usually releases this study on a semiannual basis, but, “given the current COVID-19 crisis and the associated declines in market capitalization and revision of analyst forecasts, we release an additional study as of March 31, 2020 in order to give decision-makers guidelines with regard to current valuation parameters,” the firm says. The study also includes trading multiples and total shareholder returns across a wide range of industries.

BV movers . . .

People: Sarit Rapport, ASA, was recently named president of the New York chapter of the American Society of Appraisers (ASA); she is a member of the Portfolio Valuation Group at Valuation Research Corp. … Klaus-Martin Haussmann has been appointed as a managing director in Duff & Phelps’ Transaction Advisory Services practice in Germany; he will focus on the German, Swiss, and Austrian markets.

Firms: Northlane Capital Partners has made an investment in Dallas-based VMG Health, a full-service valuation and transaction advisory firm exclusively focused on the healthcare industry … Milwaukee-based Wipfli has acquired software consulting firm Tidestone Solutions of Portland, Maine, effective April 16.

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

CPE events

• The Impact of COVID-19 on Restructuring, Insolvency & Impairment. April 29, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Craig Jacobson (GlassRatner), Richard Peil (GlassRatner), and Dan Korcyk (GlassRatner).

A discussion of three specific areas where valuation activity might increase due to the virtual shutdown of the U.S. economy.

• Projection Issues Raised in ESOP Litigation. May 5, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Chip Brown, Kyle Wishing (Willamette Management Associates), and Chelsea Mikula (Tucker Ellis LLP).

Learn the common issues raised in ESOP litigation cases with respect to financial projections in order to avoid pitfalls in your next ESOP engagement.