If you haven’t already, you will probably get this question from a client: “The pandemic forced my business to shut down. Should I reopen it or not?” Short of doing a full-blown valuation analysis, a faster method can be used that looks to external yardsticks to estimate a break-even point and calculation of value.

Idea in action: One valuation firm did this analysis for the owner of a business in a destination city with a customer base that was almost exclusively tourists. The business was shut down due to the virus, and the owner needed to get an idea of whether he should hang in there and reopen or stay closed for good. Using external data and forecasts for travel to that area, hotel bookings, convention business, and so on, the valuation analysts projected that, if the business reopened, it would break even in five years. At that point, a calculation of value was done using an industry rule-of-thumb percentage of annual sales. The analysis also showed the cash needed to stay afloat before breaking even. Armed with this information, the owner decided to reopen the business.

Of course, this is a very high-level analysis designed to provide management with an objective basis to help make critical decisions in what is an unpredictable environment. The key is to find a set of external data that will allow for this type of analysis.

For more details on this specific engagement, see the article “Reopen or Not? A Method for Analyzing a COVID-19-Shuttered Firm” in the upcoming September issue of Business Valuation Update. The authors are Amanda Sayn and David Shindel, both with the Michigan-based firm ShindelRock. For nonsubscribers, BVR is making issues that contain COVID-19 articles available on a stand-alone basis. Click here to see the issues available. They all contain practical advice on dealing with valuations during the pandemic.

Plaintiffs in Rainbow ESOP class action ready to settle case

Last week, we reported on the resolution of two major ESOP litigations. Recently, the plaintiffs in another big class action, Hurtado v. Rainbow Disposal, asked the court for approval of a settlement they have worked out with the defendants, including GreatBanc Trust, the trustee, in connection with the allegedly improper sale of all ESOP stock to a third party.

Contested sale of ESOP assets: Rainbow Disposal was one of the largest trash disposal and recycling companies in southern California. Before October 2014, the company’s ESOP owned 100% of company stock. As of June 2014, Rainbow stock made up 97% of the plan’s assets. GreatBanc was hired as the trustee of the ESOP. Under the plan, any sale of stock the ESOP held “must be made at a price no less than the Fair Market Value as of the date of the sale.” FMV was defined as “[t]he fair market value of Company stock, as determined by the Trustee … based upon a valuation by an independent appraiser.” ESOP participants were entitled to direct the trustee to vote their shares on corporate matters such as a merger or liquidation of the company. Rainbow was the plan administrator.

In August 2014, the executive chairman of the company executed an amendment to the ESOP that gave the trustee discretionary authority to sell all or substantially all shares in the company to a third party in a change-of-control transaction. In October 2014, the plaintiffs, who were plan participants, learned from a letter GreatBanc had sent that all of the stock in the ESOP was sold to the defendant Republic Services Inc. In a follow-up letter, the plaintiffs were told the stock sold at $17.66 per share. In their court complaint, the plaintiffs stated they ultimately only received about $15.10 per share. They said that DOL filings and ERISA-mandated disclosures showed that $15 million of the sale proceeds were left in undiversified investments for nearly three years resulting in “a return of virtually zero (and expenses exceeding returns).”

In September 2017, the plaintiffs filed suit, raising a host of claims against GreatBanc as well as other ESOP fiduciaries and Republic under ERISA. For example, the plaintiffs alleged GreatBanc breached its fiduciary duties to the plan by permitting the sale of Rainbow stock the ESOP held and by failing to require a participant vote to authorize the sale. GreatBanc also failed to disclose important information to plan participants regarding the October 2014 sale and proceeds from it.

In April 2019, a federal district court granted the plaintiffs’ motion for class certification.

Proposed settlement terms: In their July 27, 2020, motion for preliminary approval of settlement, the plaintiffs note two attempts at mediation that concluded with a proposal to which both sides agreed in January 2020, subject to allocation and funding. The parties later entered into a formal settlement agreement on July 23, 2020.

Under the proposed settlement, the defendants will pay $7.9 million into a settlement fund to be allocated to the class: Republic will pay $7.5 million, and GreatBank will pay $400,000. In exchange, the class will dismiss all claims against the defendants. “Given the uncertainty of establishing both liability and damages the Settlement presents an excellent result for the Class and the Court should preliminarily approve it,” the plaintiffs say in support of the proposed settlement.

Realistic way to become a specialist in a valuation niche

Orson Welles liked to say that anyone could learn anything in less than 24 hours. He claimed to learn everything about filmmaking in just one day and then made his very first film, the masterpiece Citizen Kane. We’re not sure this idea would work with everyone and in all cases, so we like the advice of Chris Mercer (Mercer Capital), who gave a keynote address at a recent conference.

It takes time: Mercer recommends a technique inspired by Earl Nightingale, a noted motivational speaker. That is, spend an hour a day, five days a week focusing on the specialty. That’s 250 hours a year, and, after four years, it adds up to 1,000 hours. “I promise you that if you spend 1,000 hours on something, you will become a specialist,” he says. Of course, this education must be done after a foundation of knowledge that includes schooling and earning BV credentials. He feels that specialization will help to rejuvenate the business valuation profession.

Mercer made his remarks during his keynote address, Vision 2020 The Future of Our Profession and Your Role in It, at the NACVA and the CTI’s Business Valuation and Financial Litigation Super Conference (June 15 to 19 and August 3 to 7).

Free webinar reveals divorce valuation insights

Mark your calendar for an August 27 free webinar designed as a lightning round of observations and advice about divorce valuations in today’s challenging environment. You can earn one CPE credit on this free 50-minute webinar, which will include valuation experts, attorneys, and industry experts. The webinar is also a preview of what you’ll learn at the AAML/BVR Virtual Divorce Conference, which begins September 9. It’s a whole new ballgame for valuations in the context of marital dissolution, so don’t miss the most impactful continuing education of 2020!

New enhancements made to DealStats transaction database

DealStats (formerly Pratt’s Stats), the state-of-the-art platform for private- and public-company transaction comparables, has made some enhancements, most notably:

• A weighted harmonic mean statistic has been added to both the “Statistics” tab and the “Summary” tab;

• The Download option for “Only Displayed Fields” and “All Available Fields” now includes a second worksheet, which contains the “Summary” tab information (so users have a record of their search criteria, their selected/deselected transaction IDs, and their summary statistics); and

• There is a new Excel download option: “All Available Fields & Analysis Tabs.”

Other new enhancements include improvements to the “Summary tab,” which now displays transaction counts and deselected transactions IDs. Also, the “Copy” button on the “Summary” tab now maintains formatting (gridlines, bolds, etc.) when pasted into Microsoft Word.

Extra: The new fourth edition of the Comprehensive Guide to the Use and Application of Transaction Databases is now available and covers the most popular transaction databases, including DealStats, BIZCOMPS, S&P Capital IQ, and more—plus new resources that have come to market, such as Tagnifi and MergerShark.

Higher multiples for cross-border vs. domestic buyouts per new study

An analysis of over 1,000 global private equity transactions reveals that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones, says a new study. The authors attribute this finding to informational disadvantages of foreign acquirers.

They also find that, consistent with this idea, “the spread in valuation multiples becomes smaller when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size.” The study, “Cross-Border Buyout Pricing,” is available if you click here.

BV movers . . .

People: Chudozie Okongwu, Ph.D., has joined AlixPartners as a managing director in its Investigations, Disputes & Risk practice; he specializes in areas of economics, finance, and valuation and will work from the firm’s London and New York offices … Jeremy Crow, CPA, CVA, has joined Ridout Barrett (San Antonio) … Chad Pendill has formed Legacy Energy Consulting LLC (Albertville, Minn.), a firm offering consulting services to propane and heating oil marketers for mergers and acquisitions and business valuation services.

Firms: New York City-based Marcum LLP has expanded its focus on accounting and advisory services to the construction industry by adding Castellano Korenberg & Co. of Hicksville, N.Y., which, in addition to providing services to general and specialized contractors, serves clients in related industries including transportation, communication, manufacturing/distribution, and real estate … New Philadelphia, Ohio-based Rea & Associates will add Kennedy Cottrell Richards of Gahanna, Ohio, effective September 1; the firm specializes in accounting, auditing, and consulting services for the government sector … Richmond, Va.-based Cherry Bekaert is adding CoNexus CPA Group of Atlanta to strengthen the firm’s presence in that key metropolitan market; CoNexus provides tax, assurance, and advisory services to families and closely held businesses nationwide … Weaver expanded its San Diego office and has moved to the firm’s permanent location in that city; the office will serve clients in the firm’s energy compliance services practice … Alvarez & Marsal (A&M) has launched a North American Automotive and Industrials Group in Detroit with Rick Kozole as managing director.

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

CPE events

• Valuation of Inventory: Taking Stock of the Guidance. Aug. 20, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Anthony J. Pumphrey (Valuation Research Corporation). Part of BVR’s Special Series on Fair Value.

Given divergences in both practice and guidance, inventory valuation can seem challenging. This webinar illustrates simple, straightforward modifications to the valuation of inventory that you can incorporate into your valuation process.

• Excelling in Litigation and Dispute-Related Valuations: How to Not Get Caught Bringing a Knife to a Gunfight. August 25, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Sean Saari (Marcum LLP) and Bob Ranallo (Marcum LLP).

A discussion of how to prepare yourself, and your valuation report, when you know your work will be subject to review and critique in a litigation or dispute setting.