Valuation takeaways from the AICPA cannabis confab

Two topics at last week’s AICPA & CIMA Cannabis Industry Conference in Colorado came up in just about every session over the three days of the event: the 280E tax issue and rescheduling. The regulatory landscape may be changing, which will have vast implications for everyone that was in the room: CPAs, attorneys, M&A advisors, industry operators, and forensics and valuation experts. Also, for the first time at this event, the IRS did a session, so it was a very informative conference

Sec. 280E of the tax law prevents cannabis businesses from deducting normal business expenses, which can mean an effective tax rate as high as 70%. But, if current efforts to reschedule cannabis as a Schedule III drug are successful, 280E will go away. Some feel this will happen before the presidential election, but others feel it will take longer. Regardless of what happens, this industry will remain a troubled and challenging sector on many levels. Here are some key points from the conference sessions:

• Cost of capital has come down a bit over the past few years due to greater access to debt and less company-specific risk, but these firms are still riskier than your typical business;

• Rescheduling should give a shot in the arm to valuations—the numerator of the valuation equation will jump;

• Despite the strong likelihood of rescheduling, it’s not “known or knowable” for valuation purposes until it happens, e.g., it shows up on the Federal Register;

• M&A multiples have not rebounded from their peak in 2021 (24x EBITDA) and now stand at 7x EBITDA—the market remains skeptical of rescheduling;

• Some firms have been filing returns as though 280E doesn’t apply, and others have filed refund claims, with some making their way to court (none have prevailed so far);

• The IRS is not “walking away” from 280E despite the move to rescheduling, so any tax refund claims are “not valid,” a position reinforced by the recently issued IR-2024-177 (some firms have filed a “protective” refund claim);

• Firms that created separate entities to escape 280E will eventually pay the tax piper;

• Retroactive 280E relief will be an uphill battle even though there are some bills in the works;

• Some think eventual descheduling (i.e., legal under federal law) seems to be on track for a possible five-year horizon; and

• The Harris-Walz team is the very first pro-legalization presidential ticket.

Recordings of most sessions will be available in about three to four weeks and will be available for 12 months on the AICPA website. More detailed coverage of the conference will be in the October issue of Business Valuation Update.

FairX valuation: from bad to worse

In a statutory appraisal case, the Delaware Court of Chancery rejected two valuation approaches in favor of its own method, which had “seriously flawed” underpinnings. The court even acknowledged that by calling it the “least bad” of all the methods presented (it could be argued that it was the worst). The case involved the 2022 acquisition of FairXchange (FairX) by Coinbase Global for $330 million in which the petitioner challenged the merger price.

Tough nut: This was a particularly hard-to-value company because not only was it a private startup with no track record and no cash flow, but it also was banking on plans to disrupt a new industry (crypto trading). The company would either be a huge success or a total flop—a real roll-of-the-dice setup. The petitioner’s DCF analysis of about $500 million was based on projections FairX did for financing purposes, but the court rejected the analysis because the projections were “too speculative.” Also, the court noted that the company’s shareholders (sophisticated investors) effectively rejected the projections when they voted for the merger. The other side’s analysis came up with a value of about $150 million, based on past valuations done for financing rounds. But the court rejected that methodology also because the most recent round had failed and prior rounds were done too long ago to be relevant.

So the court decided it was better equipped than the experts to opine on value and chose the deal price of $330 million—even though the court detailed many flaws in the sale process. Plus, no evidence of synergies was presented, so no adjustment was made.

So what valuation method would have passed muster in this case? The court likened the company to a rare treasure that’s worth whatever someone is willing to pay, but that’s not much help. This was more like sunken treasure—maybe you’ll find it and maybe you won’t. It’s like valuing a game of chance or an option of some sort. Maybe Damodaran’s methodology that includes a specific “failure risk” factor would be appropriate here. Well, we’ll see what happens the next time this situation comes up.

The case is Hyde Park Venture Partners Fund III L.P. v. FairXchange, LLC, 2024 Del. Ch. LEXIS 270; 2024 WL 3579932, and a case analysis and full court opinion will appear on the BVLaw platform.

Two strikes against FTC’s ban on noncompete agreements

In the wake of the overturned Chevron decision, a second federal judge has ruled that the impending ban on noncompete agreements is likely invalid. The judge, in a Florida case involving a real estate developer, blocked the Federal Trade Commission from applying the ban pending the outcome of a lawsuit claiming the FTC lacked the power to adopt the ban, which is scheduled to go into effect September 4.

In July, a federal judge in Texas blocked the FTC from enforcing the ban against a coalition of business groups, including the U.S. Chamber of Commerce. But, later that month, a judge in Philadelphia refused to block the rule, finding that it was reasonable for the FTC to determine that noncompetes are “exploitative and coercive.” Because of the competing rulings, the stage may be set for a circuit split on this matter.

Some states have already banned noncompete agreements, but the FTC rule would be the first nationwide ban. The overturning of the Chevron decision opened the door to these challenges because it weakened the power of federal agencies to interpret ambiguous laws through rulemaking.

Reminder: Please take a survey on staff shortages

That’s the topic of this month’s “Two-Minute Practice Builder” survey. Is your firm experiencing a shortage of staff? At what level: junior, senior, or clerical? Please take just a few minutes to give us your observations—click here to take a fast survey. The survey deadline is August 31, and we’ll share the results in the September 11 issue. Thanks for participating!

Updates to two closed-end fund reports are available

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities. Updated versions (to July 2024) of two sources of CEF data, prepared by Bruce A. Johnson and James R. Park (Partnership Profiles), are now available:

1. 2024 Closed-End Fund Report: Fixed Income Securities. Use this report to compare privately held family limited partnerships (FLPs) and LLCs that hold money market funds, certificates of deposit, government bonds, municipal bonds, corporate bonds, or other fixed income investments; and

2. 2024 Closed-End Fund Report: Stocks and Equity Investments. Use this report to compare privately held FLPs that hold common stock, preferred stock, mutual funds, REITs, or other corporate equity investments.

Price: $295 each.

Want to help shape the future of the BV profession?

Consider joining BVR’s inaugural Leadership Council, an independent, professionwide group that will share insights, drive innovation, and shape the future of business valuation practice. In addition, there are some benefits to council members, including the opportunity to network, participate in public-facing events, and have VIP access to valuation research insights. Interested? The application deadline is August 31. For more details and eligibility requirements, click here.

ASA adds new ‘Power Network Hour’ to its annual conference

Here’s an interesting new networking event that will be held at the ASA International Appraisers Conference September 15-17 in Portland, Ore. It’s called the Power Network Hour, and it will offer “quick, structured interactions designed to foster meaningful connections” with professionals from various ASA disciplines. The event is designed to “uncover potential collaborations, partnerships, and career prospects” and will be held Monday, September 16, from 5:30 p.m. to 6:30 p.m. There is no charge to attend this event, but the ASA requests that you RSVP in advance to lisa@meetingcreations.net. A cash bar will be available.

There will be more networking events in addition to almost 70 educational sessions across six discipline tracks and some preconference courses. You can register for the main conference if you click here. If you can’t attend in person, you can register for live streaming of the sessions. If you miss a session, you’ll have on-demand access to all sessions for 90 days after the conference.

V20: Uniting and raising the profile of the valuation profession

That is one of the main goals of the V20 Summit and Conference in São Paulo, Brazil, September 30 to October 2, says Ben Elder, global leader of valuation at RICS. He will be moderating a very interesting session on the role of international and local valuation standards with a panel of leading valuation professional organizations (VPOs) around the world. Elder is also looking forward to the sessions on technology and AI, he told Ray Moran (FON Valuation Services) in an interview that’s available on YouTube (click here to watch). The V20 event coincides with the annual G20 summit (also in Brazil this year) to promote recognition of the V20 and the valuation profession within the G20 group. BVR is happy to be a media partner for the V20. For more details and to register, please click here.

The Summer 2024 edition of EBVM is now available

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the latest edition of the European Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The Summer 2024 issue includes:

• “Unbiased Beta Despite Biased Data: Some Elementary Results,” Leonhard Knoll, Lutz Kruschwitz, Andreas Löffler, and Daniela Lorenz;

• “Tax Purchase Price Allocations in Carve-Out Transactions,” Moritz Bassemir;

• “Data: Industry Betas and Multiples (for Eurozone Companies),” Martin H. Schmidt and Andreas Tschöpel; and

• “Data: Transaction Multiples for Europe,” Stefan O. Grbenic.

There are also some news items from the IVSC and EACVA as well as a profile of the NiRV (Dutch Association of Registered Valuators). You can download the issue and sign up for future issues if you click here.

BV movers . . .

People: Robert J. Zahner, CPA/ABV, ASA, CVA, has been promoted to principal-in-charge at HBK Valuation, Litigation & Forensics, effective January 1; he has valued privately held companies for a variety purposes, including estate and gift, shareholder transactions, financial reporting, divorce, and M&A … Jennifer Anderson, CPA/ABV, was promoted to senior transaction advisory manager at Eden Prairie, Minn.-based Boulay; she specializes in business valuations for enterprises, intangible assets, and securities, including debt, equity, options, and preferred stock for both public and private middle market companies … Dr. Charles Parekh has joined the Economic Damages team at HKA as a partner in the firm’s Chicago office; his expertise encompasses the analysis of extensive transactional data to calculate damages in litigation related to financial markets, mortgage transactions, and healthcare billing and coding … At Columbus, Ohio-based GBQ Partners LLC, Zach Koch and Perry McMichen have been promoted to associates in the firm’s Valuation & ESOP Advisory Services area.

Firms: Forvis Mazars has been added to the strategic partner program at Financial Executives International (FEI), a professional association for finance leaders; the program is limited to firms with the select capabilities and skill sets to serve dynamic global businesses … Two firms made the 2024 Inc. 5,000 list of fastest-growing U.S. private companies: Rainwater CPA (Bel Air, Md.) is ranked No. 725 and business valuation is one of the firm’s three service lines and Philadelphia-based Centri Business Consulting, with a business valuation practice area, earned the 1,992nd spot … Houlihan Lokey, the global investment bank, has agreed to acquire Waller Helms Advisors, an independent advisory firm that provides investment banking services to clients in the insurance and wealth management sectors; the deal is expected to be completed before the end of this year, following regulatory approvals.

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

CPE events

BVLaw Case Update, August 28, 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; James D. Ewart, James D. Ewart LLC; and Andrew Z. Soshnick, Faegre Drinker Biddle & Reath LLP. CPE credits: 2.0.

Two veteran valuation experts and a family law attorney/valuation expert examine recent valuation and financial litigation decisions.

Mind the Gap: BV Theory and Practice, September 4, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Josh Shilts (Shilts CPA, PLLC) and Victor Jarosiewicz (Georgia State University). CPE credits: 2.0.

A practitioner and an academic seek to bridge the gap between theory and practice in business valuations today. This session, the first in a series, will focus on the company-specific risk premium.