Can you apply a DLOM under the asset method?

Kevin Yeanoplos, James Lurie and Chris Mercer’s discussion during the recent BVR webinar “Everything You Always Wanted to Know About DLOM But Were Too Afraid To Askelicited several interesting questions, one of which was:

What do you do in a situation where you're valuing a small privately held company and the asset approach is used and not a cash flow method? How do you apply a DLOM?

Mercer replied:

“Let's assume that the asset that is being valued is a basket of marketable securities or real estate or art – it really doesn't matter.  We get the market values of those assets under the asset method and we value the financial control level of the partnership using the asset method.

It's very difficult to use the asset method to value an illiquid interest. So what we would do in valuing the interest, the 3 percent partnership interest, for example, is value it based on an income approach.  What are the benefits to be derived from the 3 percent partnership interest that I just defined over a reasonable expected holding period for that investment until liquidity is achieved, or until the partnership is dissolved, or until it's sold, or until the managing partner decides to liquidate the securities and make a distribution?

So those are the only cash flows that are going to be obtainable to the investors so we use the income approach and value the illiquid interest, but we use the asset approach to value the enterprise.”

For more information about the webinar click here.

Meanwhile, strategic buyers paid record premiums in 2009

Strategic buyers paid record premiums of 40.9% in 2009, as reported by BVR financial analysts working with Mergerstat®/BVR Control Premium Study™ data. After acquisitions practically grinded to a halt during the deep U.S. economic drop, deal activity began picking up. Capable strategic buyers capitalized on opportunities—and were willing to pay a premium for them. Financial buyers, potentially a better indicator of a “pure” control premium, also paid substantial premiums in 2008 and 2009—their highest since 2003.  Our free summary of median control premiums is available here as an exclusive download for BVWire readers.  And, if you're looking for all you can find on the subject of control premiums, you'll want to check BVR's recently published special report, Control Premiums: Application and Analysis.

Tax Court accepts taxpayer’s dollar-for-dollar discount for built-in capital gains tax liability (sort of. . . )

A wealthy New Yorker owned the majority (82%) of a closely held C Corp, which in turned owned 94 acres of lake front property in New Hampshire, including state-of-the-art athletic facilities, horse stables, and a summer camp for girls. When the owner died, the estate’s appraiser determined a net asset (adjusted book) value for the corporation of just over $3.7 million, minus nearly $1 million for built-in long-term capital gains tax (LTCG) liability on a dollar-for-dollar basis. The IRS agreed on the NAV and a 5% marketability discount, but disputed the LTCG discount.

At trial, the estate urged the Tax Court to adopt a 100% LTCG discount, not only because the adjusted book value method presumes asset liquidation, but also because the 2nd Circuit (the appellate forum in this case) would most likely follow Estate of Dunn (5th Circuit) and Estate of Jelke (11th Cir.) in adopting a dollar-for-dollar discount. (See BVWire™ # 62-3). The IRS appraiser argued that an overall discount of only 10% to 13% for the LTCG was appropriate (or just about half of the current embedded liability), based on a complicated review of closed-end funds—but the Tax Court rejected their comparability to the specific assets in this case.

At the same time, the court “declined to speculate as to how the…Second Circuit” would rule in on this issue. Instead, it cited the 2nd Circuit’s 1998 decision in Estate of Eisenberg to find as an initial matter that a LCTG discount was appropriate.

Demonstrating its valuation savvy, the Tax Court (in an opinion by Judge Vasquez) then conducted its own calculations based on the FMV of the improved property, multiplied by appreciation and interest rates compounded over 17 years and a 40% effective tax rate to reach an LTCG tax liability of approximately $1.2 million—or slightly higher than the taxpayer’s amount, which led it to accept the same without adopting a per se dollar-for-dollar discount (leaving that issue ripe for appeal to the 2nd Circuit).

Read the full digest of Estate of Jensen v. Commissioner, T.C. Memo. 2010-182 (Aug. 10, 2010) in the October BVUpdate. The court’s opinion will soon be available at BVLaw™

Updated survey offers valuation benchmarks for ambulatory surgery centers

Within the healthcare industry, ambulatory surgery centers (ASCs) are some of the most common physician-owned entity types. Consequently, there is frequently a need to determine the value of these shares as new physicians buy-in and retiring physicians depart. For the past 17 years, HealthCare Appraisers Inc. has interviewed ASCs to determine trends in the value and characteristics of ASC ownership interests.  Click here for the new report: 2010 Valuation Survey: How do ASC Companies Assess Value.

Fifth Circuit advises Tax Court on conservation easement valuation

Real estate easement cases before the tax court can offer some interesting guidance to BV professionals. Whitehouse Hotel Limited Partnership et al. v. Commissioner (August 12, 2010) is a good example. Lance Hall (FMV Opinions) has prepared a summary of the valuation issues from this case. Hall says “on appeal, the issues before the Fifth Circuit were:

  • whether the Maison Blanche property should be valued alone or combined with the Kress building (and related properties)
  • the highest and best use of the property, (c) the valuation approaches that should be utilized
  • whether the IRS’s expert was qualified
  • whether a deviation from Uniform Standards of Professional Appraisal Practice (USPAP) would render the IRS’s expert’s valuation report unreliable
  • whether the burden of proof should be shifted to the IRS, and
  • whether the Taxpayer had shown sufficient reasonable cause to rely on experts and, thus, avoid any gross undervaluation penalty.”

Divorce valuation Summit features keynote on the role of neutral experts

The position of a jointly retained neutral expert can be tenuous at best. Join Jay Fishman (Financial Research Associates), William Morrison (Morrison & Company),John Johnson (BST Valuation & Litigation Advisors), and Brian Brinig (Brinig & Company) for a discussion on the topic at BVR’s 3rd Annual Summit on Business Valuation in Divorce, hosted by Morningstar Valuation Services. On September 14th in Chicago, these four experts will discuss everything you should know when engaged as a joint expert, from engagements and scope of work to procedures for successful performance of joint retentions to how to handle opposing demands and objectives.

More information on the Summit is available on our website.

TAF’s new Appraisal Practices Board (APB) seeks participation and assistance

TAF’s recently established Appraisal Practices Board (APB) will complement the work of the Appraisal Standards Board and the Appraisal Qualifications Board.  The seven- member multi-discipline APB is responsible “for issuing voluntary timely guidance to appraisers on emerging valuation issues that are occurring in the marketplace.”  The Board is asking for your suggestions on research topics such as “emerging valuation methodology, conflicts in present practice or conflicts among existing authorities.”
Click here for TAF’s solicitation letter.  Current APB Board members are:

            Gary Taylor – Chair
            Jay Fishman – Vice Chair
            Guy E. Griscom
            Alan Hummel
            Alok Mahajan
            John S. Marrazzo
            Jim Vernor

Beware the issues with ESOPs and repurchase obligations

At the confluence of aging employee stock ownership plans (ESOPs) and a slow or troubled economy remains a valuation nightmare.  The culprit: repurchase obligations.  On Thursday, August 26, attorney Jared Kaplan (McDermott Will & Emery) and appraiser Robert Gross (Prairie Capital Advisors) will discuss these new and emerging challenges in “ESOP Valuation: Repurchase Obligations”, a 100-minute webinar.  Join these experts to learn how repurchase obligations can obscure the viability of an ESOP plan or its operating company, what that means for your valuation, and how you can best tackle these obstacles.

For more information on the webinar click here.  Two CPE credits are available.

BVWire looks forward to seeing you in the fall…

The ASA/CICBV and AICPA annual valuation conferences are coming up in October and November, respectively.  But, we also hope to see you at the BVR IP Valuation and Divorce Summit events in three weeks.  Event details are below. 

BVR/Morningstar Summit on Best Practices in Business Valuation in Divorce
September 13-14, 2010 - The Auditorium at Morningstar Global Headquarters, 22 West Washington St., Chicago, IL. Learn More & Register

Sessions include:

  • Properly Implementing the Bernier Methodology in Valuing Pass-Through Entities
  • Divorce Testimony: Judges, Lawyers, and Appraisers on the State of the Art
  • Rules of Evidence in Divorce Matters: New Issues & Precedents
  • Avoiding the Double-Cross: Pitfalls for the Joint Expert
  • Electronic Discovery: Drafts, Notes, Emails, Texts and How to Do it Right
  • Professional Goodwill and Rights of Publicity
  • Discounts for Lack of Marketability: New Research
  • Reasonable Compensation: Valuing Complex RSUs and Stock Options
  • Coming out of the Recession: Are Valuation Databases Now Undervaluing?
  • Premarital Business Appreciation: Apportioning Active vs. Passive Appreciation
  • The Impact of Healthcare Reform on Medical Valuations
  • SSVS-1 and USPAP: Do the Courts Really Care?

BVR/Morningstar Summit on Best Practices in Valuing Intellectual Property
September 15-16, 2010 - The Auditorium at Morningstar Global Headquarters, 22 West Washington St., Chicago, IL. Learn More & Register

Sessions include:

  • International Standards and Risks for IP Value
  • IP Valuation and Management and their Impact on Shareholder Value
  • How Prudent Management of IP is Dependent Upon Sound Valuation
  • Roles in Valuing IP: A Case Study
  • Transfer Pricing of IP Assets
  • Monetizing IP Assets to Increase Shareholder Value
  • Patent Damages
  • The Critical Intersection of IP Valuation and Fair Value for Financial Reporting
  • Navigating legal Minefields in IP Valuation: New Case Law
  • IP Valuation Research: Defending Your Conclusion of Value
  • Early Stage Valuation
  • Where Do We Go From Here? Conference Summary and Conclusions


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