BVR Logo August 14, 2019 | Issue #203-2

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


Strong win for DOL in Vinoskey ESOP trial

Difficult times for the ESOP community. In a much-anticipated opinion in the Vinoskey ESOP case, the trial court recently ruled in favor of the Department of Labor on all remaining claims, finding the defendant trustee and company’s owner caused the ESOP to overpay for company stock by $6.5 million. This ruling comes close on the heels of the 4th Circuit’s Brundle decision, which upheld the trial court’s liability and damages findings against the trustee.

Suspect ‘discretionary choices’: The flashpoint was a 2010 transaction in which the owners of a successful Virginia company sold the remaining 52% of company stock to an ESOP for $406 per share. A 2009 appraisal valued the stock at $285 per share. The DOL argued the $406-per-share price exceeded fair market value (FMV). The trustee breached its fiduciary duties to the plan by failing to scrutinize the underlying appraisal, and the owner/seller was liable for accepting a price he knew exceeded FMV.

The trial court agreed. Its analysis was guided by the Brundle decisions, in which the 4th Circuit stressed that the ESOP trustee had to act “solely in the interests” of the plan participants. In the instant case, the trustee failed on multiple fronts, the court found. It pointed to testimony from the trustee’s key representative that the goal was a deal that was fair to both the seller and the ESOP. This and similar comments signaled “divided loyalties,” the court found. It also observed that the trustee never engaged in any negotiation at all over the price. Rather, the trustee’s first offer to buy was $406 per share, i.e., the final price. As the court saw it, the trustee “had significant leverage to make a lower initial offer, since [the owner/seller] was plainly eager to close the deal before the agreed-upon closing date.”

The court focused on a “guesstimate” that a company representative had emailed to the trustee and ESOP appraiser early in the process, which put the value of the planned transaction at about $21 million. The court noted that many of the ESOP appraiser’s “discretionary choices were geared toward” developing an appraisal that matched the estimate. For example, the appraiser, in his capitalization of cash flow analysis, used an “unusually low discount rate,” an inexplicably low cap rate, and a working capital assumption that did not align with the historical rate, the court found. It also questioned the appraiser’s decision to add back certain costs based, to some extent, on the appraiser’s assumption that, by owning 100% of company stock, the ESOP would in fact have control over the company. This assumption was mistaken, the court found. It noted that the company’s existing corporate structure and leadership rules, explained in ESOP plan documents and corporate bylaws (which the trustee reviewed), made it impossible for the ESOP to have complete control. The court noted that the final transaction documents did not provide for a change to the existing rules. The trustee did not press for the changes. The court found a discount for lack of control was justified.

The court acknowledged that representatives of the trustee did in fact review a draft appraisal and raise a number of concerns. However, the trustee did not “follow through” on whether the appraiser dealt with the issues in his final report, the court said. It called the diligence process “rushed and cursory.” The trustee had the burden of showing that the ESOP did not pay more than “adequate consideration” for the stock and it failed to do so, the court concluded.

Stay tuned for additional coverage of this long opinion in an upcoming BVWire.

A digest of Pizzella v. Vinoskey (earlier Acosta v. Vinoskey), 2019 U.S. Dist. LEXIS 129579 (Aug. 2, 2019), and the court’s decision will be available soon at BVLaw.

Expert comments on Vinoskey ESOP ruling

ESOP appraisers are questioning the technical aspects of the Vinoskey and Brundle rulings and asking what the recent rulings may mean for the future of employee ownership plans. Jim Joyner (Integra Valuation Consulting LLC), a certified business appraiser who has served as ESOP trustee for almost 100 ESOPs, offers his takeaways.

Joyner says the recent rulings are an “ominous sign for every ESOP formed within the past six years.” As he sees it, “no ESOP is safe from the DOL’s aggressive oversight and litigation-driven enforcement approach.” He notes that the Vinoskey decision “advances the DOL’s position that, if the ESOP does not gain ‘unfettered control’ over the company immediately after the acquisition of all company stock, appraisers must apply a discount for lack of control (5% in this case) against the indicated equity value.”

He also points out that the court’s many direct and indirect criticisms of the use of the capitalization of earnings/cash flow method for the ESOP appraisal make it clear that this method “is practically anathema for any ESOP valuation.” Any appraiser brave enough to use it needs to use a “look-back” period of six years or more, Joyner cautions.

Joyner finds it particularly troubling that this 100-page opinion contains no meaningful discussion of the standard of fair market value. He notes that the court seemed concerned exclusively with what a hypothetical buyer (the ESOP) would agree to pay when the FMV standard also requires consideration of what a willing seller would accept to close the deal. As FMV is traditionally understood, both sides must be considered, Joyner says. He contrasts this decision with certain U.S. Tax Court decisions in which Tax Court judges rigorously framed their discussion of FMV in terms of a hypothetical willing buyer and a hypothetical willing seller, both parties seeking to achieve an economically advantageous outcome.

What is missing in this long court opinion, Joyner notes, is any consideration of Vinoskey’s decision to make the successful company he created into an employee-owned company. Joyner continues: “I have never met Mr. Vinoskey, but I imagine he is filled with bitter regret. Overall, this ruling may have a chilling effect on other entrepreneurs considering an ESOP. The decision was not in the best interest of employees who would like to benefit from the most successful form of employee ownership: an ESOP.”

Joyner concludes: “To me, this case shows why federal district court judges should no longer adjudicate ESOP lawsuits. The complexity of ESOP litigation demands a special master who has the financial skills that are found among Tax Court judges, patent law judges, or the Delaware court judges. The outcome of ESOP cases can contribute to the demise of this form of employee ownership or help with its expansion. It’s therefore important that these complex cases are tried by a specialized court.”

Which ERP camp are you in? Please take our survey.

When you drive your car, should you look through your windshield or the rearview mirror? True, looking at where you’ve been may give you some indication of where you’re headed, but most would opt for looking straight ahead. As a valuation expert, do you look backwards to historical returns to estimate expected returns? That’s the question for our latest in a series of minisurveys on the cost of capital. This one is on the equity risk premium (ERP), which the “dean of valuation,” Professor Aswath Damodaran (Stern School of Business, New York University), calls the “number that drives everything we do.” In the latest update to his paper, “Equity Risk Premiums (ERP): Determinants, Estimation and Implications,” he describes the three basic approaches used to estimate the ERP: (1) the historical return approach; (2) the implied approach (which he prefers), which is an internal rate of return (using future cash flows and current stock prices); and (3) the survey approach, where investors or managers are asked to provide estimates of the ERP for the future. Which do you prefer? Please take our short survey by clicking here, and we’ll report the results in the next issue. By the way, if you’re driving using your rearview mirror and you see that you’re on a pier, you may want to consider hitting the brakes.

PwC explains FASB proposal to upend goodwill model

Should annual goodwill impairment tests be done away with for public companies? Should other assets be subsumed into goodwill? The FASB is asking these questions and others as it solicits feedback in its recent invitation to comment on identifiable intangible assets and the subsequent accounting for goodwill (comments are due October 7). In a podcast interview, Andreas Ohl (PwC) talks about the five things you need to know about the FASB’s proposal. Ohl is also the chairman of the Business Valuation Standards Board at the International Valuation Standards Council.

ASC benchmarking study released

The median EBITDA margin for an ambulatory surgery center (ASC) is 20%, according to the “2019 ASC Benchmarking Survey” from HealthCare Appraisers Inc. The survey examined price increases, volume concentration, financial statement statistics, working capital needs, and revenue per case. The survey was developed in collaboration with the Ambulatory Surgery Center Association (ASCA) and received responses from 118 surgery centers.

Companies cite mass shootings as a risk factor

Several public companies have cited mass shootings as potential risk factors in their financial reports, according to the Wall Street Journal. Companies such as Dave & Buster’s Entertainment, Del Taco Restaurants, Stratus Properties, Cheesecake Factory, and others have added warnings to investors about how such tragic events could affect their bottom line. Most of the disclosures portray the risk in terms of customer traffic and company reputation, the article says.

ICVS credential adds financial instruments training

The International Association of Certified Valuation Specialists, in conjunction with the Center for International Business Valuation, has added an advanced level to the International Certified Valuation Specialist (ICVS) credential. Valuators can now earn the ICVS with Advanced Studies in Financial Instruments (ICVS-A). The ICVS-A designation can be earned along with the initial ICVS or can be added to enhance a current ICVS credential. The ICVS-A designation requires an understanding of valuation techniques for various financial instruments, ranging from basic securities to complex derivative constructs.

Live training begins: The inaugural live training, presented with the Southeast Chapter of Business Appraisers, will be held in Orlando, Fla., on December 16, December 17, and December 18. Business valuators with a credential such as the ICVS, ASA, ABV, CICBV, BCA, or CVA are welcome to attend. Upon completion of the training program, students can participate in the ICVS-A credentialing exam. For more information, there’s an ICVS-A brochure; to register for the training, click here.

Hong Kong issues transfer pricing guidance

The Hong Kong Inland Revenue Department (IRD) has released Departmental Interpretation and Practice Notes (DIPNs) Nos. 58, 59, and 60 and an updated version of DIPN No. 28 related to transfer pricing (TP Guidelines). DIPN No. 58 provides detailed explanations on transfer pricing documentation and country-by-country reports. DIPN No. 59 provides guidance on the arm’s-length principle and transfer pricing rules. DIPN No. 60 discusses how to ascertain profits attributable to a permanent establishment. DIPN No. 28 was updated to set out IRD’s interpretation and practice on the provisions relating to foreign tax deduction after the enactment of the Inland Revenue (Amendment) (No. 6) Ordinance 2018.

Preview of the September 2019 issue of Business Valuation Update

Here’s what you’ll see:

  • Is Your Cost of Capital Data Backing You Into a Corner?” (BVR Editor). In a recent court case, the valuation expert tried to use professional judgment but the data being used did not support her opinion. The expert could not adequately explain why she chose not to go where the data led her.
  • 10 Things to Know From the NACVA 2019 Conference” (BVR Editor). The importance of storytelling, a re-examination of the terminal value, the dangers of technology, cost of capital woes, online marketing tools, and more highlighted the 2019 Annual Consultants’ Conference, presented by the National Association of Certified Valuators and Analysts (NACVA).
  • Control Premiums and Deal Flow Analyzed in 2019 Mergerstat Review (BVR Editor). This is an M&A year in review, highlighting the trends in multiples and sector analysis through the 12,008 transactions of 2018, the sixth most acquisitive year in history. Includes a discussion of the most notable transaction, a twist on a notable cancellation, analysis on the industrial services sector, and the trend in premiums.

The issue also includes:

  • An expanded section of “BV News and Trends/Global BV News and Trends.”
  • Regular features: “Ask the Experts” and “Tip of the Month.”
  • BV data spotlight: “DealStats MVIC/Revenue Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and “FactSet Mergerstat/BVR Control Premium Study.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.
To stay current on business valuation, check out the September issue of Business Valuation Update.


BV movers ...

People: The National Association of Certified Valuators and Analysts (NACVA) has named Dave Miles, CPA, CVA, CGMA, business valuation manager at ValuSource, outstanding member (second quarter 2019) … Ruben Ramirez, CPA, ABV, has been promoted to manager at Clayton & McKervey (Southfield, Mich.); he’s part of the transaction advisory group focusing on tax due diligence, deal structuring, business valuation, and related tax planning … Jim Peko has been named as the national managing principal of the advisory services practice at Chicago-based Grant Thornton; he most recently served as national managing principal of the firm’s transaction services practice … Jerry Henderson has been appointed regional managing partner for national advisory services at Springfield, Mo.-based BKD CPAs & Advisors, effective June 1, 2020.

Firms: Whitlock & Co. and Ingram Overholt & Bean, both located in Alcoa, Tenn., will join forces to create the largest accounting firm in Blount County; the combined firm will have over 33 professionals … West Hartford, Conn.-based blumshapiro will merge with Cowan Bolduc Doherty (CBD) of North Andover, Mass.; this expands the firm’s presence in Massachusetts to five locations and adds 20 professionals, including three partners … Matthews, N.C.-based LBA Haynes Strand expands its footprint in the state with the acquisition of the Asheboro, N.C., office of Richmond, Va.-based Cherry Bekaert; the firm now has almost 80 professionals … New York-based Marcum LLP has acquired OGH Certified Public Accountants & Advisors of Coral Gables, Fla., adding two partners, 17 associates, and a second office in the Miami area.

Please send your professional and firm news to us at

Upcoming BVR training events

  • Reasonable Compensation for Closely-held Businesses + RCReports Demo (August 15), with Stephen Kirkland (Atlantic Executive Consulting) and Paul Hamann (RC Reports).

    Practitioners armed with the knowledge and the proper tools can easily determine reasonable compensation for any company. The discussion includes a demo of RC Reports software in action.

  • Calculating Damages in Intellectual Property Disputes: New Guidance (August 20), with Jeff Press (EisnerAmper LLP) and Drew Voth (Alvarez & Marsal). This is part of BVR’s Special Series on Intellectual Property.

    Learn about the changes to the theories, techniques, and oft-cited case law addressed by intellectual property damages experts in the patent, copyright, trademark, and trade secret areas. Based on the new 4th edition of the AICPA/CIMA Practice Aid for Calculating Damages in Intellectual Property Disputes.

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

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