Duff & Phelps has decreased its recommended U.S. equity risk premium (ERP) from 6.0% to 5.5% for use as of Dec. 9, 2020, according to a client alert. This new rate, used in conjunction with the firm’s recommended normalized risk-free rate of 2.5%, implies a “base” U.S. cost of equity capital estimate of 8.0% (5.5% + 2.5%). D&P decreased its recommended ERP due to the increasing stock market prices (driven in large part by the expected approvals of COVID-19 vaccines), continuing commitment by the Federal Reserve Bank to maintain low interest rates, lower uncertainty regarding the impact of the U.S. presidential election on the economy and future corporate earnings, and other factors, says the firm.

Parties’ agreement complicates spousal support calculation in S corp context

Instead of facilitating a resolution, a separation agreement between the divorcing spouses led to a protracted lawsuit. The issue was how to determine alimony where the owner spouse had an interest in a pass-through entity and the agreement was not entirely clear as to what income to consider. On second review, the appellate court found the trial court, based on expert testimony, had used a method that satisfied the terms of the agreement.

Dispute over distributions: The husband owned a 40% interest in a company that was organized as an S corporation. The trial court’s May 2017 judgment of divorce incorporated a separation agreement the parties had executed. It said alimony and child support shall be based on “pre-tax income from employment” and this income “shall only include salary and cash bonus received by [the husband]” before certain deductions. The term “pretax income” expressly excluded distributions to the husband flowing from his ownership interest.

A different paragraph said the husband was to pay alimony as of June 1, 2007, based on pretax income, “which income the parties stipulate to be $192,000 per year.” Support amounts would be based on a joint appraisal that determined the fair market value of the husband’s ownership interest and found reasonable and appropriate compensation for the year ending Dec. 1, 2005, was $175,000. The parties agreed to add direct benefits amounting to $17,000 to the base amount. The provision noted that the pretax income specifically excluded any amount representing the return on investment the husband would receive as an equity holder in the business.

After income dropped as a result of the 2008 recession, the husband’s payments petered out and finally stopped. The husband asked the court for a modification of the agreement, and the wife unsuccessfully filed a motion for contempt, arguing the husband had failed to meet his support obligations.

The case first went on appeal after the trial court, trying to determine how far the husband was in arrears, calculated the income based on the husband’s W-2 income only. The appellate court remanded. It said the agreement required inclusion of direct benefits and the term “pretax income” potentially included amounts that could be K-1 distributions.

On remand, the trial court credited the methodology of the husband’s valuation expert to determine income for 2009, 2010, and 2011 for purposes of recalculating arrearage. According to the expert, when valuing a closely held company, income was divided between reasonable compensation and return on investment. He said this task was to “carr[y] forward” the method the initial appraiser had used. He said he used compensation surveys, including those from the Risk Management Association and BizMiner, for his reasonable compensation calculation.

The appellate court upheld the trial court’s recalculation of income.

‘Want more’ from the valuation profession, advises Hanlin

To “get more” from the business valuation profession, you need to “do more,” says William Hanlin, president and CEO of the International Association of Certified Valuation Specialists (IACVS). He gave one of the keynotes at the Second Annual Conference on the Art and Science of Business Valuation, which was held online December 7-8. When he says “do more,” he means to learn, read, and help grow the profession by contributing. “I urge each of you to be a contributor by writing, teaching and volunteering—get involved in the global profession,” he says. When you write, teach, conduct conference sessions or webinars, you learn your profession more, he points out. He also stressed that valuation experts need to do a lot of reading about what is going on in the profession. “Reading is what keeps you current” by learning what your peers are doing.

In his keynote, Hanlin also noted that, around the world, there is now more consistency in valuation practice due to education efforts of global valuation professional organizations (VPOs), including the efforts of the IACVS. There has also been increasing adoption of the International Valuation Standards (IVS) from the International Valuation Standards Council (IVSC). He also stressed the importance of transparency and the importance of global VPOs working together.

Prepare now for future business interruption claims due to COVID-19

Now is the time to educate yourself on how to calculate damages from business interruption due to COVID-19, advised Kerrie Merrifield (Axiom Forensics) at the recent NACVA and the CTI’s 2020 Financial Valuation Virtual Conference. While she points out that insurers have been categorically denying claims and discouraging their clients from filing, the loss event has not ended yet, so there will be a flood of claims when this is all over. That means a “great demand” for financial experts in this niche, she says. In the meantime, Merrifield advises experts to read policies very carefully, work with a public adjuster or attorney, and document all the work done in the matter, including following up phone calls with confirming emails.

Match industry forecasts to valuation date

At a number of conference sessions we’ve attended recently, speakers say that they are spending a great deal more time on the industry and economic analyses for their valuations. Also, with things changing so rapidly these days, an industry forecast prepared on a date that is different from the valuation date may be less relevant. Of course, every industry is different. One industry going through rapid changes is the restaurant business. We just took a look at the First Research report (updated on Dec. 7, 2020) for the restaurant industry, which points out the special struggles that eateries are facing as we move into the winter. In certain areas, restaurants are temporarily closing for the winter because outdoor dining is no longer feasible in cold weather. Others are remaining open and using certain strategies to buoy their operations. Not surprisingly, the report gives the industry a “low” growth rating. The report also includes trends, benchmark data, and questions to ask management. In addition to industry profiles, First Research also provides state profiles and Canadian province profiles for thousands of segments.

New edition of landmark damages guide
now available

The 6th edition of the Comprehensive Guide to Economic Damages has just been released. This guide has been revised and expanded with new chapters and court cases. The two-volume guide combines the financial expert’s knowledge of accepted methods and procedures with the attorney’s knowledge of legal issues and insights to provide a unique and in-depth analysis and interpretation of the continually expanding body of case law. The new edition is edited by Nancy J. Fannon (Marcum) and Jonathan Dunitz, Esq. (Verrill Dana), with Jimmy Pappas (Marcum), Bill Scally (Marcum), and Steve Veenema, Esq. (Murphy & King), and it draws on the expertise of nearly 70 financial experts and attorneys. For more information on the guide, click here.

BVR featured in ABA podcast on
divorce valuations

BVWire editors Sylvia Golden and Andy Dzamba joined moderator Tom Urquhart at the American Bar Association on a podcast to discuss Business Valuation in Divorce: A Case Compendium, a book co-published by BVR and the ABA. The book features analyses of over 200 court cases arranged by date and jurisdiction as well as articles on contentious valuation issues in the context of divorce. These issues include how goodwill and S corporations are valued, as well as insight into active/passive appreciation, double dipping, and more. The podcast can be found if you click here. For more information on the BVR/ABA book, click here.

Tip for Zoom speakers using faux backgrounds

We were attending a valuation conference on the Zoom platform, and, when one of the speakers appeared, all we saw was a disembodied head seemingly floating in space—a very cool and creepy effect but not necessarily one you want to see during a business conference or during virtual court testimony! The problem stems from the use of an artificial background. That is, instead of showing the actual background (e.g., a messy home office or the beach), a speaker can insert a background of choice using “chroma key” technology, which has been used for many years in television broadcasting. A person is placed in front of a colored screen and the color is keyed out and replaced with some other background. If the person is wearing clothing of the same color as the keyed-out color, the clothing will disappear as well. Typically, the color green is used because it is the most different from skin tone, but sometimes blue is used. So, if you want to use a virtual background, check what color will be eliminated before choosing your wardrobe.

Comments wanted on IASB paper on
business combinations

At the recent Second Annual Conference on the Art and Science of Business Valuation, conference co-chair Joel M. DiCicco, Ph.D. (Center for International Business Valuation), informed the audience that the International Accounting Standards Board (IASB) has begun a consultation process for possible changes in the accounting standards for mergers and acquisitions involving companies within the same group. DiCicco noted that some companies report fair value information about the acquired company, but others report only book value information. This diversity in practice makes it hard for investors to understand the effects of such transactions and hinders comparisons, he pointed out. For more information on the discussion paper, “Business Combinations Under Common Control,” click here. The deadline for comments is Sept. 1, 2021.

Preview of the January 2021 issue of Business Valuation Update

Here’s what you’ll see:

• “Business Valuation Year in Review 2020” (BVR Editor). What a year! This is a recap of developments in the business valuation profession under the shroud of COVID-19 including the latest thinking on methodologies, changes in regulations, new and updated resources, and practice-building ideas.

• “The Top Valuation and Damages Cases of 2020” (Sylvia Golden, Esq.). Our pick of valuation-related court cases includes state and federal court decisions covering many areas of law that dealt with novel issues of law or, in some way, enhanced our understanding of valuation and damages issues as they arose in a litigation setting.

• “Choose Your Client Wisely in a Bankruptcy Engagement” (BVR Editor). Robert Reilly (Willamette Management Associates) and Josh Shilts (Shilts CPA) conducted an informative session on valuations for bankruptcy at the AICPA FVS Conference.

• “New Research Paper Joins Call to ‘Let Go’ of the Size Premium” (BVR Editor). A look at the latest paper that joins mounting academic research over the recent past that shows that the size effect no longer exists—or was never there in the first place.

• “Insights From the Record-Breaking ASA Fair Value Conference” (BVR Editor). A huge audience listened to top speakers discuss current issues, company-specific risk, technology assets, preferred equity, inventory, and a regulatory update.

• “Adjusting the Income Approach Highlights AICPA FVS Conference Panel” (BVR Editor). A panel at the AICPA FVS Conference fielded a barrage of audience questions about how to help make sure the income approach captures the impacts of the current environment. The panel, moderated by Jim Hitchner (Financial Valuation Advisors), included Lisa Cribben (Wipfli LLP), Harold Martin (Keiter), and Mark Zyla (Zyla Valuation Advisors LLC).

The issue also includes:

• A full 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/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the January 2021 issue of Business Valuation Update.

BV movers . . .

People: Katy Whitehead, CVA, CEPA, has joined Atlantic Management Co. Inc. (Portsmouth, N.H.); she provides business valuation services to closely held businesses and her experience includes employee stock ownership plans (ESOP), gift and estate valuations, merger and acquisition analysis, litigation support, and transaction support … Several staff announcements at Columbia Financial Advisors Inc. (Portland, Ore.): Robert Regis, ASA, was named principal (he does appraisals for financial reporting, mergers and acquisitions, and tax reorganizations, as well as valuations for gift and estate tax purposes and ESOPs); Arlene Ashcraft, CFA, ASA, was named managing principal (she specializes in ESOP valuation and financial advisory services, estate and gift tax valuations, and appraisal for litigation support with extensive experience in the engineering/consulting and forest product industries); and Donny Springer, ASA, was named managing principal (he specializes in engagements for ESOP-related valuation and financial advisory services and estate and gift tax valuations).

Firms: Naperville, Ill.-based Sikich LLP is expanding its presence in the St. Louis area by adding Chesterfield, Mo.-based Hochschild Bloom & Co., a firm that offers accounting, tax, and audit services to companies across a range of industries, with deep experience in the government sector; the deal brings about 40 Hochschild Bloom employees, including four partners, to Sikich … Prompted by the firm’s continued growth, New York City-based EisnerAmper LLP opened its headquarters at 733 Third Avenue; the 125,000-square-foot space is designed to offer leading-edge technology and training/event facilities to create engaging client and colleague experiences, with special considerations for safety … Atlanta-based Aprio LLP is expanding its foothold in the New York City market by adding Tarlow & Co. … Stambaugh Ness (York, Pa.) strengthens its position in the architecture, engineering, and construction (AEC) space with the acquisition of Aecumen LLC, a marketing and business development consulting firm exclusively serving the AEC industries … Houston-based Calvetti Ferguson will add Mark M. Jones & Associates (MMJ) of Fort Worth, Texas, a firm that provides tax planning and compliance, assurance and accounting services to a diverse clientele, including private businesses and high-net-worth individuals; after the deal, Calvetti Ferguson will have more than 140 team members in Texas with over 35 in Fort Worth alone … Thomson Reuters has selected Lafayette Hill, Pa.-based McCarthy & Co. PC as the Luca Pacioli Award winner in the “COVID-19 Response” category.

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

CPE events

• Physician Compensation and Valuation: Administering Top Tier Treatment. December 17, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Kathryn Culver (PYA) and Derek Long (PYA).

Learn how physician compensation is analyzed in the context of valuation along with various factors that can influence it, both internally and externally, including the pandemic.

• Restaurant Valuation: Serving Your Clients During the COVID-19 Crisis. December 29, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Lynton Kotzin (Kotzin Valuation Partners).

The pandemic has turned the restaurant industry upside down. While it’s more difficult to do a valuation today, this discussion will help you make them just as reliable as before.

Holiday Break
After taking time off for the holidays, BVWire will be back on Wednesday, Jan. 6, 2021. We wish you a safe and happy holiday season!