BVR Logo February 5, 2020 | Issue #209-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:

On double-dip issue, Ohio appeals court agrees with Gallo analysis

A recent Ohio appeals court decision expressly agreed with its sister court’s 2015 ruling in Gallo that state law does not prohibit double dipping but does require the trial court to avoid unfairness in distributing marital assets and determining spousal support.

In divorce, the double-dip issue typically arises when the court values the business asset under an income approach for purposes of equitable distribution and also considers the income from the business to determine spousal support to the nonowner spouse. In Gallo, the 10th district Court of Appeals noted it was “the future income stream, not the marital asset, that is the subject of the doubling in the double dip.”

No ‘double dipping offset’: In the instant case, the husband owned a financial services company and a limited liability company providing management consulting services. At trial, only the husband offered expert testimony on the fair market value of both businesses and income available for spousal support. Using an income approach, the husband’s expert found the financial services company was worth $1 million. Normalized compensation to the husband from this company was $310,000. The expert used an adjusted net asset approach to value the LLC, finding it was worth $25,000. The three-year average of distributions the husband received from the LLC was about $106,000. According to the expert, the normalized income available for support was about $416,000. At the same time, the expert found the husband’s actual three-year average income was about $520,000, approximately $100,000 more.

The trial court credited the expert’s valuations and awarded the companies to the husband. For its spousal support calculation, the court used the husband’s three-year average income ($520,000). The court said there was no double dip as to the distributions from the LLC “due to the valuation method used.” And, even though the expert used an income approach to value the financial services company, the valuation also included hard assets and cash on hand besides the husband’s income, the trial court said. The trial court concluded, under the facts of the case, “equity did not require a double dipping offset.” In determining spousal support, the court mentioned various factors showing the husband was financially in a much stronger position than the wife.

The husband appealed the trial court findings with the 9th district Court of Appeals, arguing it was error to use actual average income rather than normalized income when calculating spousal support. Doing so resulted in an “inequitable ‘double dip.’”

The Court of Appeals (9th district) said it agreed with its sister court’s analysis in Gallo that the applicable statute “precludes an outright prohibition of double dipping” and that the trial court should, “in the interest of equity,” consider the impact of double dipping to avoid unfairness. Here, the trial court cited specific circumstances that were “overriding the unfairness in double dipping,” the appeals court said. It upheld the spousal support ruling.

A digest of Kim v. Kim, 2020-Ohio-22 (Jan. 8, 2020), and the court’s opinion, will be available soon at BVLaw. A digest and the court’s opinion in Gallo v. Gallo, 2015-Ohio-982, 2015 Ohio App. LEXIS 938, are available now to BVLaw subscribers.

Mark Zyla’s four-step approach to building authority in BV

When you think of fair value measurements, one name that immediately comes to mind is Mark Zyla, who recently launched his own firm (Zyla Valuation Advisors), which is based in Atlanta. How did he become a leading authority in this area of practice? It doesn’t happen overnight, as Zyla explained during a recent interview with Rod Burkert (Burkert Valuation Advisors LLC). “You need to have a long-term plan,” says Zyla, who used a four-step strategy to build his authority—to great success.

  1. Choose a practice area. Pick an area that you are interested in and that hopefully has some promise. Zyla mentioned that estate and gift would be a good area for someone just starting out. Even though recent tax law changes have put a damper on this area a bit, it’s relatively “low risk,” and there is a lot of guidance available. Whatever niche you choose, go into it gradually and don’t immediately abandon every other area of your practice.

  2. Start giving back. Become involved in the valuation profession by serving on committees at your professional association or other group. Zyla was part of the group that developed the first valuation in financial reporting advisory from The Appraisal Foundation. He currently chairs the Standards Review Board at the International Valuation Standards Council. Not only does this help cement your authority, but it also puts you on the cutting edge of thought leadership that you can apply in your own practice.

  3. Write. When asked what one thing contributed most to building his practice, Zyla pointed to his book, Fair Value Measurement, Practical Guidance and Implementation, which has just come out in its third edition. Burkert agreed that writing a book has become extremely important to differentiate yourself in this profession. “A book is today’s business card,” he says.

  4. Let the world know. It’s one thing to become an authority, but you need to let everyone know about it. Get out in front of people by, for example, speaking at conferences or webinars. And don’t just target events your peers attend; get in front of potential clients and referral sources, such as business owners and attorneys. Zyla is also a big proponent of social media as a good way to broadcast your authority.

The interview was part of Burkert’s webinar series, Practice Development INSIDER, that features some of the leading valuation practitioners revealing their time-tested ideas behind building a practice. The next webinar will be February 7 and will feature Gary Trugman (Trugman Valuation). For more information on the series, go to Burkert’s website.

DLOM support: the more the better

Two main approaches for estimating a discount for lack of marketability (DLOM) are restricted stock studies and pre-IPO studies. During a recent webinar, an attendee asked: “Is there a general consensus as to which is better when estimating DLOM: restricted stock studies or pre-IPO studies?” Actually, it really is not a case of “either or” but rather that you should not rely on only one approach. Evidence from several sources should be assembled and integrated into your analysis. “We use both,” says Brian Pearson (Valuation Advisors), who is a valuation practitioner as well as the creator of the Valuation Advisors Lack of Marketability Discount Study, an online database with over 15,300 pre-IPO transactions. In addition to the two types of studies, he uses the Mandelbaum factors and LEAP option discount-based data. “The more ammunition you have in your arsenal to arrive at a discount, the better,” he says.

Free webinar: A free recording of the webinar, Pre-IPO Revival: Up Your DLOM Game in 2020, is now available in which Pearson discusses new data added in 2019, misconceptions and criticisms of pre-IPO data, and uses for the data that extend beyond estimating a DLOM.

New lease rules jolt stock returns

Stock valuations took a one-time shock in the first quarter of 2019, possibly because of the new lease accounting standards from the Financial Accounting Standards Board, according to an article in the Wall Street Journal. New academic research suggests that future accounting standards could have similar unfavorable consequences on businesses, the article says. The new rules require companies to treat operating leases as liabilities. U.S. public companies adopted the new rule in the first quarter of 2019. Private companies and nonprofits must implement the rule for the fiscal year and interim periods beginning after Dec. 15, 2020.

Last year, KPMG and Deloitte issued reports that examine the valuation impact of the similar IFRS 16 lease accounting rules, the KPMG International Valuation Newsletter (July 2019) and Deloitte’s “IFRS 16 Valuation Impact” (August 2019). The new rules are “likely to complicate the comparability of valuation multiples, particularly in the short term,” says the Deloitte report. KPMG advises: “A consistent approach is of the utmost importance when applying the multiple methods.”

Private firm multiples up, per BIZCOMPS update

The median sale price-to-SDE multiple for all industries reported at its highest level in 2019, at 2.09x, according to the BIZCOMPS Deal Review, a regular publication that analyzes general trends, valuation multiples, and operating ratios for transactions in the BIZCOMPS database. The database contains primarily small, Main Street private companies and includes over 13,300 transactions dating back to 2000. The database has been updated with new transactions, and some other highlights include:

  • The median sale price to annual gross sales for all industries declined in 2019 after reaching its highest level in 2018; and
  • The median sale price to annual gross sales across all three size ranges decreased in 2019 after reaching its highest level in 2018.

“SDE” stands for seller’s discretionary earnings, which is defined as: net profit before taxes and all compensation to one working owner plus amortization, depreciation, interest, other noncash expense, and non-business-related expense.

Preliminary agenda out for 2020 AAML/BVR National Divorce Conference

Do you share one of the dirty little secrets of valuation? You can find out because that’s on the preliminary agenda just released for the National Divorce Conference to be presented by BVR and the American Academy of Matrimonial Lawyers (AAML) in Las Vegas, September 10-12. Leading matrimonial attorneys and financial experts will give you critical insights in sessions covering financial, valuation, forensic, and legal issues surrounding this growing area of practice. The conference will be at the Venetian Resort, and early-bird pricing is currently in effect. You can register if you click here. We hope to see you at this unique event!

Video of panel on whether goodwill is a
wasting asset

Accounting rule makers across the globe are mulling the idea of upending the current goodwill impairment model and reverting back to one of amortization. A panel of international business valuation experts discussed this during the IVSC’s Annual General Meeting in Singapore. An interesting 54-minute video of the discussion is now available, and the panel includes Andreas Ohl (PwC), Kevin Prall (BDO), Eugene Hsiao (CFA Institute), Tatsumi Yamada (IVSC), and Wiley Pun (Savills).

The IVSC has put out two exceptional papers on this matter. The first paper concludes that goodwill is not a wasting asset, a conclusion supported by empirical evidence. The second paper concludes that, while the current impairment model provides “significant” information to users of financial statements, its performance as a leading indicator has been inconsistent, but reverting back to amortization would only make matters worse. The third and final paper is due out this spring and will include “practical solutions to enhance the information value of the goodwill impairment test.”

BV movers ...

People: Enterprise, Ala.-based Carr Riggs & Ingram has named several new partners: Josh Whitworth, CPA, CVA (Dallas office); Steven Lorady, CPA, ABV (Nashville, Tenn., office); and Chad Hudson, CPA, CFE, CFF, CVA (New Orleans office) … Karen Shenk, CPA, CVA, CFE, a partner at Lancaster, Pa.-based Trout CPA, has earned the professional designation of Certified Construction Industry Financial Professional (CCIFP) from the Institute of Certified Construction Industry Financial Professionals.

Firms: Ridgeland, Miss.-based Matthews Cutrer and Lindsay (MCL) has added Mosley and Co. of Clinton, Miss., which will assume the MCL brand; this is the first office in Clinton for MCL … Horvath & Giacin of Pennington, N.J., a full-service accounting firm with a staff of 22, has joined New York City-based EisnerAmper … Topeka, Kan.-based Mize Houser & Co. has changed its name to Mize CPAs Inc. and also has a new logo and website … Pasadena, Calif.-based KROST has added BPE&H of Woodland Hills, Calif., expanding KROST to 200 team members In the wake of its merger with Cleveland-based Skoda Minotti, New York City-based Marcum has opened a new downtown Cleveland office; nearly 30 employees from existing Marcum offices in the region have relocated to the new downtown Cleveland location, and an additional 20 new hires are planned … New York City-based Prager Metis CPAs has combined with three of the seven New York offices of D’Arcangelo & Co.; the deal adds locations in Poughkeepsie, N.Y.; Rye Brook, N.Y.; and Millbrook, N.Y., along with 12 team members who will join as partners and principals … The firm of Bryce Holder (Boone, N.C.) has joined Blackburn, Childers and Steagall (BCS), the largest firm based in upper east Tennessee with over 100 employees.

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Upcoming BVR training events

  • Stripping Away the Mystery: Valuing Adult Cabaret Businesses (February 6), with Rod Burkert (Burkert Valuation Advisors) and David Shindel (ShindelRock).

    Enter the world of adult nightclubs with this peek into a business with very different operating characteristics than you’re used to seeing. Learn about the various types of clubs, their sources of revenue, entertainer relationships, available data, and the significant risks these establishments face. Don’t miss this one!
  • Demystifying the Complex World of Discounts for Lack of Marketability (Part 2) (February 13), with Pasquale Rafanelli (Empire Valuation Consultants).

    These two sessions will go over the most prominent DLOM methods, when they should be applied, and how to apply them. Part 1 (a rebroadcast with live Q&A) focuses on benchmark study approaches and security-based approaches. Part 2 (live) discusses the analytical approaches and includes an in-depth case study.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

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