DOL prevails in ESOP valuation lawsuit

The former owners of the company behind those ubiquitous Cruise America RVs must not be happy campers after a recent ruling from an Arizona court. The court found that they violated ERISA and breached their fiduciary duties when setting up an ESOP that the DOL said overpaid them for their shares. The ESOP purchased 100% of the shares of the company (RVR Inc.) for $105 million in May 2014. The DOL filed a complaint in 2019.

The court largely rejected the defendants’ valuation of the stock in favor of the valuation the expert for the Department of Labor did. The former trustee of the ESOP was also targeted by the DOL but was not part of this lawsuit because it had earlier settled a complaint and paid $22.5 million back to ESOP participants.

Biggest red flag: The defendants’ valuation of the company stock included a control premium because the ESOP was purchasing 100% of the shares. But the court found that the defendants intended to maintain “complete control over every aspect” of the company and the ESOP trustee would have “no control.” The court deemed arguments claiming the ESOP had “substantial elements of control” to be “nonsensical.” In addition to the control issue, the court had other problems with the defendant’s valuation:

• For the market approach, the companies chosen were not comparable to the subject company;

• In its DCF, an exit multiple was used but rejected by the court because it was based on comps that the court felt were not comparable; and

• The valuation did not include a line of credit that had a significant balance.

However, the defendant’s valuation included the valuation of warrants, which the court agreed should be included and added it into the DOL’s valuation, which rejected the market approach in favor of a DCF. The court’s final valuation was $33 million—a far cry from the $105 million price tag to the ESOP.

Rushed deal: Outside of the valuation issue, the court noted that the defendants insisted on a rushed timeline so they could reap certain personal tax benefits, which resulted in not enough time for proper due diligence (i.e., the tax tail wagging the ESOP dog). Also, the trustee was negotiating a top-line number even though crucial terms of the deal had not yet been worked out (which turned out to be highly favorable to the sellers), said the court.

There are a lot of details on the valuations and other aspects of the deal in the 45-page opinion, but the court has not yet determined the appropriate remedies. The case is Su v. Bensen, 2024 U.S. Dist. LEXIS 145404 (Aug. 15, 2024), and a case digest and full opinion are available on the BVLaw platform.

Texas judge KOs FTC’s ban on noncompetes—nationwide

In last week’s issue, we reported that a Florida judge blocked the Federal Trade Commission from applying its impending ban on noncompete agreements. Back in July, a Texas judge did the same thing but temporarily. Now, the same Texas judge has struck down the ban nationwide, just a few weeks before it was scheduled to go into effect on September 4. This means that, for now, businesses can continue to use noncompete agreements as long as they are consistent with current laws in their jurisdiction.

Can a state court declare that its ruling applies across the nation? The FTC says that, despite the Texas ruling, the agency will pursue enforcement actions on a case-by-case basis. Meanwhile, a third case, in Pennsylvania this past July, upheld the FTC ban, so this matter is likely headed to the U.S. Supreme Court.

As valuation analysts know, noncompete agreements can have a material impact on the value of a company. Outside of that, some feel that the FTC ban is not good for the economy. “In my opinion, this rule banning noncompetes has been an intrusion into the operations of the U.S. economy that is unprecedented,” writes veteran valuation expert Jim Alerding in a BVWire News blog post. “I am hopeful that the Supreme Court will ultimately set aside this disruptive rule. If it is not, it could embolden the FTC and other agencies to meddle in the operations of a free economy in the United States.”

BVR’s RADA getting a good workout

What is the CIMI method for valuing an auto dealership—and is it the same as blue sky? Is a 50% ownership considered noncontrolling? Were Kohler family transactions used to determine the value of the company (from the landmark 2006 Tax Court case)? These are just a few of the many questions being asked using BVR’s new Research and Data Assistant (RADA) tool, which is now available to subscribers of the BVResearch Pro platform. And not only does it provide answers, but RADA also gives you the page numbers from where it gets its answers and will give the citation when prompted.

For now, RADA works on one document at a time, whether it be a one-page article or a 1,000-page book. But this is just the very first step. The tool will evolve to encompass the entirety of BVR’s massive archive of valuation data and content—over 30 years’ worth of articles, books, court cases, transaction data, economic and industry research, and more. Also, it will be made available to a broader range of BVR customers.

How to use it: After you log in to BVResearch Pro, navigate to a PDF document—it can be an article, a webinar transcript, an entire book, or any other PDF on the platform. You’ll see a “Launch RADA” button, and, when you click on it, a new page will open. You’ll see the PDF you selected with a side panel that will allow you to enter a query or prompt (or select from some suggested ones). If the document has the answer, it will show up along with page numbers for reference. If the document does not specifically address the issue that you’re asking about, it will say so and may infer a response. Either way, you’ll get a summarized answer. Of course, as with any tool of this kind, you’ll need to review and corroborate the results before relying on them.

Stay tuned for more developments that will involve more BVR data and content.

Most BV firms worry about ongoing staff shortages

Almost 80% of business valuation firms say they are concerned about a future or ongoing staff shortage, according to this month’s Two-Minute Practice Survey. In terms of a current shortage, it’s about half and half—56% say they are now short-staffed, mostly at the junior appraiser level (80% of respondents). But 60% of the respondents say they are short of senior-level appraisers. While the biggest problem is the difficulty in finding qualified people, over half (57%) of firms say the problem is that their volume of work is increasing (a nice problem to have). Other reasons for the shortage include compensation and benefits issues (cited by 29% of respondents), staff retirements (14%), and career shuffling (14%). Our thanks to all of you who participated, and we’ll have another survey next month.

Have you commented on the revisions to the cheap stock guide?

Comments are due by September 20 on a working draft of two updated chapters from the AICPA Valuation of Privately-Held Company Equity Securities Issued as Compensation guide. The chapters address secondary market transactions, and the revisions are designed to better align with FASB ASC 820, Fair Value Measurement, and FASB ASC 718, Compensation—Stock Compensation. The new guidance will likely have significant implications for financial reporting valuations of private-company common stock underlying stock-based compensation awards.

Be a volunteer! Consider the TAF BV Resource Panel

September 1 is the deadline to apply to join The Appraisal Foundation’s Business Valuation Resource Panel. The panel oversees the development of BV valuation advisories, provides input on exposure drafts, and offers insight on emerging issues or other significant matters. The panelists will serve staggered terms commencing Jan. 1, 2025, for up to three years. Reappointments thereafter will be made annually as needed. For more information and to apply, click here.

Investments in intangibles examined in WIPO study

Intangible investments grew at three times the rate of tangible investments between 2008 and 2023, proving resilient despite economic uncertainty and tighter monetary conditions, according to “World Intangible Investment Highlights,” an annual report co-published by the World Intellectual Property Organization (WIPO) and the Luiss Business School (LBS). Investment into intangible assets, such as research and development (R&D), software and data, brands and design, has consistently outpaced investment in tangible assets, such as machinery and equipment, since 2008. As a result, investment into intangible assets constitutes a growing share of gross domestic product (GDP) among the economies this report covers. The U.S. leads in terms of absolute levels of investment in 2023, with a figure six times higher than second-ranked France.

Feedback wanted regarding valuation topics for IVSC’s agenda

The International Valuation Standards Council (IVSC), the global standard-setter for valuation practice and the valuation profession, has opened its 2024 Agenda Consultation to solicit input to help set the agenda for the future development of the International Valuation Standards (IVS). Feedback is wanted about valuation topics that the IVSC should address as part of its current agenda as well as additional valuation topics that should be prioritized or added to the agenda. The document highlights several key themes for consideration, including ESG, technology, and “valuation risk,” i.e., quality control. Comments are due October 9. To download the 2024 Agenda Consultation paper and how to submit feedback, click here.

BV movers . . .

People: Fifteen intellectual property experts at Stout have been named as world-leading patent professionals in the IAM Patent 1,000 2024 rankings. These professionals are involved in patent valuations, damages, forensics, litigation, and more, and they are: Melissa Bennis, John Bone, Julie Davis, Lindsey Fisher, David Haas, Stephen Holzen, Mark Hosfield, Michael Jeffords, Patrick Kennedy, Kevin McElroy, Jeffrey Press, Michele Riley, Sara Rinke, Dana Trexler, and Scott Weingust (who is also recognized in IAM Strategy 300) … Sean Trahan has been appointed managing director at Alvarez & Marsal Tax LLC within its Transfer Pricing line of service; his areas of concentration include intellectual property (IP) planning and value chain optimization, as well as complex controversy management for large multinationals.
Firms: Pewaukee, WI-based The BERO Group, which specializes in economic damages, has joined Aperture LLC, a national forensic services firm with headquarters in Arlington, Texas; Aperture is a portfolio company of Trinity Hunt Partners, a growth-oriented middle-market private equity firm based in Dallas … New York City-based EisnerAmper has acquired Pasadena, Calif.-based KROST CPAs in a deal expected to close in September 2024; KROST has eight partners and a staff of more than 100 professionals across California offices in Los Angeles, Woodland Hills, and Pasadena and is a full-service accounting, tax, and business consulting firm servicing the hospitality, technology, financial services, manufacturing, real estate, sports and entertainment, nonprofit, and other sectors.

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.

Holiday Break

BVWire will take a break for the Labor Day holiday next week. We will resume publication on September 11. Have a happy and safe holiday!