Immediate guidance is needed in a number of areas in the new tax law, and the top area of concern is the “qualified business income” (QBI) deduction, says the AICPA in a letter to the IRS and Treasury. How the new tax law is implemented will affect business cash flow, operations, and long-term strategy that will impact all business valuations.
Clear as mud: New IRC Code Section 199a allows a 20% write-off of QBI for sole proprietors, owners of S corporations, and members of partnerships/LLCs. Trouble is, Section 199a is 22 pages long with about 20 defined terms, dozens of cross-references within the new section and to other sections, and complicated computations. The AICPA lays out a number of issues related to the QBI deduction, including the need for a detailed and clear definition of QBI, the interaction of Section 199a with other sections of the tax law, and the calculation of QBI for complex business structures, such as multiple tiered entities. In addition to QBI, the AICPA points out 38 other areas of the new law that require immediate guidance.
Extra: Beginning with the February 2018 issue, Business Valuation Update has started a series of articles on the valuation impact of the new tax law. The March issue has the first of a two-part article discussing the problems the new QBI deduction poses for valuations of a pass-through entity under the fair market value standard.
Tax reform will put a lot more cash in business coffers, but, when doing a valuation, you need to determine just how that extra cash will manifest itself in the future. Some indication comes from a recent survey by Morgan Stanley that showed Wall Street stock analysts expect companies to allocate 43% of tax savings to dividends and buybacks, 17% to capital spending, and 13% to workers, the Associated Press reports. Some say that money used for buybacks is often better spent on improving operations and making workers more productive. “What are you getting from buying back stock? It doesn’t generate any growth, any real activity,” said James Abate, chief investment officer of Centre Asset Management.
Mahler interviews Chris Mercer on expert witnessing
Listen to a podcast with Chris Mercer (Mercer Capital), one of the country’s leading business appraisers as well as a prolific author and frequent lecturer. He’s interviewed by Peter Mahler, a business divorce attorney with Farrell Fritz in New York City. Mercer shares what he calls “confessions of a reluctant expert witness” in which he gives insights from many years in the trenches. They are equal parts wisdom and good humor!
The BVWire News blog has a post that contains a link to a free e-book by Michael Gregory (Michael Gregory Consulting LLC), DLOMs and the IRS. Gregory is a former IRS territory manager now in private practice who championed the DLOM Job Aid the IRS published in 2011. The e-book contains a list of DLOM models that the IRS most likely will accept and also includes some tips when dealing with the IRS in an examination.
Negotiating tip: One of the tips in the blog post says to understand who the decision-maker is when starting the negotiation process. “The decision-maker is not the IRS business valuer. The initial decision-maker is the agent or the estate and gift tax attorney. The final decision-maker is the manager of the agent, or the manager of the estate and gift tax attorney. Seek to uncover the interests of those involved, and always keep those interests in mind as you negotiate the valuation issues.”
To access the blog post with the link to the free e-book, click here.
The U.S. economy—as indicated by GDP—grew at an annual rate of 2.6% in the fourth quarter of 2017, which is slower than the 3.2% rate reported for the third quarter of 2017, according to BVR's latest quarterly Economic Outlook Update (fourth quarter 2017). But the fourth-quarter figure still ended the year on solid footing as the GDP rose 2.3% for 2017 compared with 1.5% growth in 2016. “The momentum gained over the later quarters suggests even more economic growth to come in 2018,” says the report.
Commercial banks and other firms are looking to capture a piece of the healthcare dealmaking market, according to a report in the PE Hub Wire. Recently, Cincinnati’s Fifth Third Bancorp said it agreed to buy Coker Capital Advisors, a healthcare-focused boutique M&A shop founded less than a decade ago. This past October, KeyBanc Capital Markets closed its acquisition of Cain Brothers, a New York City healthcare investment bank. There are many more regional and boutique healthcare M&A shops out there, and “there’s growing interest in adding healthcare M&A operations from entities ranging from accounting firms to other regional or specialized banks,” says the report.
Bloomberg on tax reform impacts on specific industries
The Tax Cuts and Jobs Act (TCJA) impacts many aspects of valuation, and a slew of provisions apply to specific industries. Bloomberg Tax has prepared an analysis, “Industry-Specific Impact of Tax Reform,” which is available if you click here (free registration required). It examines 18 industry sectors, including banking/financial institutions, hospitality, manufacturing, private equity funds, real estate, retail, and more.
New data added to Pratt’s Stats Private Deal Update
In the Pratt’s Stats Private Deal Update for the fourth quarter 2017, you’ll see a new section that shows median asking price to sales price as well as median days to sell. For 4Q17, the median sale price ($224,875) was 90% of the median asking price ($250,000) and the median days to sell was 228. The Pratt’s Stats Private Deal Update is available with a subscription to the Pratt’s Stats deal database. It is a quarterly publication that analyzes private-company acquisitions by private buyers in the database. Pratt’s Stats features more than 29,000 private-company transactions, with up to 149 data points that include six valuation multiples and 13 financial ratios.
RBSA Advisors, recently appointed by the Indian government as valuation advisors on the sale of Air Indi, has published a research report, “The Reward of the Rupee: Cost of Capital in India.” It finds that the median WACC for all listed companies is approximately 12.8%. The median cost of equity and cost of debt for all sectors analyzed is 15.8% and 9.8%, respectively.
People: Neil Wadhwani has joined Houlihan Lokey as a vice president in the Healthcare Financial Advisory Services practice in Atlanta; he’s formerly with E&Y as a manager in its Healthcare Valuation and Business Modeling group … AICPA appointed Jeffrey Buchakjian chair of the certified in financial forensics (CFF) credential committee; he’s a partner and forensic accounting specialist in the financial advisory services group of New York-based EisnerAmper … Rick Davis, CEO of Greenville, S.C.-based Elliott Davis, was elected vice chair of the board of directors of Moore Stephens North America, effective January 1 … St. Louis-based Brown Smith Wallace named Cheryl Foster as director of practice growth, formerly marketing and business development; she has been with the firm for seven years … Brock Schechter & Polakoff (Buffalo, N.Y.) promoted Kevin Majchrowicz to director of audit and accounting, assuming responsibility for quality control.
Firms: Sadd Velazquez Higashi Shammaa of Glendale, Calif., changed its name to The Accountancy; its motto now is “Forward Thinking for Your Financial Future”…Pennsylvania firms Rotz & Stonesifer PC (Chambersburg) and Butler, Gingerich & Co. Inc. (York) have merged, adding seven staffers and retaining the York office … New York-based Prager Metis CPAs created a new staffing company specializing in recruitment services: PM Human Capital Solutions … Barsema Tuzik & Hurley (Downers Grove, Ill.) has merged with Eagan & Co. in Naperville, Ill. … Houston-based Briggs & Veselka has acquired Pathway Forensics, a digital forensics firm specializing in computer forensics, e-discovery processing and hosting, data analysis, corporate investigations, and expert witness testimony … Correction: Prairie Capital Advisors Inc. (Oakbrook Terrace, Ill.) a corporate advisory and investment banker, has hired the personnel of KC&G Business Appraisal Associates Inc., a Kansas firm; KC&G was not acquired as previously reported.
Recent actions in the health insurance market, continued increasing regulatory initiatives, and consolidation/integration in the healthcare delivery system are keeping imaging center transactions in play.
Return Models and Mean Reversion (March 8), with Gary Schurman (Applied Business Economics). Part 1 of BVR’s Special Series on Advanced Modeling and Methodologies.
A discussion on the transition from discounted cash flow models (which use accounting metrics) to return models (which use economic metrics) and how the concept of mean reversion, which is an economic fact of life, should be accounted for in your valuations.
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